An offering price is the value at which a stock begins trading in the public markets. It is determined by the investment bankers who are leading the procedure, which is known as underwriting, in addition to attorneys and executives from the company that is being brought public. An offering price is based on a number of factors, and investor demand will ultimately determine where a stock begins trading.
A company's initial day of trading in the public stock market is known as its initial public offering (IPO), although there are months and sometimes years of preparation leading up to that time. When a company decides on an IPO, the first step is to file listing documents with the regulatory body overseeing the financial markets in the region. For instance, in the US, that body is the Securities and Exchange Commission. In London, it's the Financial Services Authority.
Once the paperwork is filed, investment bankers, lawyers, and company executives get to work on determining the stock's public offering price. Factors that might weigh into this decision include where similar stocks in the same sector are trading, the value of the listing company's assets, and its debt. Investment banker fees are additional components to the total value of a new offering. A trading range is established to illustrate the expected initial offering price for the new issue.
The underwriting team will usually embark on a road show, which is done to gauge investor interest in a company and to raise awareness about the forthcoming IPO. It is a chance for company executives to communicate their message about a company, its business model, and plans for growth. The target audience in a road show includes large investors such as financial institutions, because these are the firms that will potentially make the largest investment in the stock. If the road show is a success, an offering price might land at the high end of the pre-determined range. A lackluster road show could result in a lower listing price or a delay of an IPO.
After a stock begins trading at the offering price, investors determine its value from that point on. A stock often has its best day of trading ever on its offering day when investors are flocking to a new opportunity. Whether or not the stock trades above or below the public offering price after that depends on supply of the stock and demand from investors.