What is a Price Band in an IPO?
The price band plays an immensely vital role in Initial Public Offerings (IPOs). This is because the price band meaning is to determines the prices through which the shares of a company will be sold to investors. It sets limits for the minimum and maximum price at which investors can buy these shares during an IPO process. Hence, for investors, understanding this information is essential to determine the expected value of stocks and make informed decisions. This blog intends to explain how price bands work, the types, and the factors that impact it. Let’s discuss them in detail.
Key Highlights
- Price band in IPO are very essential because they establish the lowest and highest prices for which shares will be sold to investors.
- The price bands set upper and lower limits for stock transactions, preventing extreme price fluctuations. Thereby, ensuring market stability and orderliness.
- Depending on the security, price band percentages can differ. For example, low at 2%, medium at 5%, high at 10%, and very high at 20%. This means during any given trading period price adjustments would occur differently.
- If a stock’s price hits its upper or lower limit, trading might be paused for some time. Thus, ensuring the market remains steady amid fluctuating conditions.
Table of Contents
How Do Price Bands Work?
Price bands are set by sellers to establish the upper and lower limits for stock trades specifying a range within which a stock may be traded. This method assists in controlling violent shifts in stock prices. The upper limit or cap determines the highest price at which shares can be exchanged. Whereas, the lower limit or floor must lie within 20% below the cap.
There are two main scenarios:
Stock Price Hits the Upper Limit: In case the share price hits its maximum, there could be no additional proposals or sellers, as all orders waiting are priced to that extent.
Stock Price Hits the Lower Limit: Whereas, if the cost drops to its lowest point there may not be any market bids or buyers since all orders waiting are at lower rates than this limit.
For instance, if within 20% of its initial value stock is predicted to change, the exchange may stop all trades to let the market stabilise. This system allows orderly transactions between buyers/sellers. Moreover, it helps firms measure demand for their shares besides helping preserve an organised marketplace.
Factors that Impact Price Band
Several factors influence the setting of a stock’s price band, which plays a crucial role in maintaining market stability. Let’s discuss them below:
- Basic tendencies of the market
- Positive reports concerning the performance of the corporation
- Set-up of departments and leadership within private companies
- The financial efficiency of the business model of the corporation
- Standard of shares
- Desire for shares
- Future growth possibilities for the corporation
- Current market prices of shares belonging to different firms in an identical industry
Types of Price Bands
Price bands are ranges that denote how much stock may change price during a trading session. The purpose of price bands is to keep prices from extreme fluctuations, thus helping the market remain stable. Moreover, if the price of a share reaches its upper or lower boundaries, transactions in that stock may be suspended for some time. So, let’s discuss different kinds of price bands:
- 2% Daily Price Band: A stock can move up or down by 2% from its previous closing price.
- 5% Daily Price Band: A stock can fluctuate by 5% in either direction.
- 10% Daily Price Band: The price of the stock can vary by 10% up or down.
- 20% Daily Price Band: Applies to certain securities like debentures or preference shares, allowing a 20% movement.
- No Price Bands: Some stocks, especially those with derivatives, don’t have price bands.
Price bands can be changed according to the market situation. Analysing everyday deviations based on downward movements, whereas evaluating is done in terms of upward reviews after every two months subject to certain requirements.
Example of Price Band
For instance, let’s assume that a company has 100 shares available for sale and their price band runs from Rs. 10 to Rs. 20 per share. The lower and upper limits of this price band are called floor and cap respectively. The bids made by investors are as follows:
| Bid Price | Number of Shares | Cumulative Shares | Cumulative Percentage of Shares |
| Rs. 20 | 20 | 20 | 20% |
| Rs.15 | 30 | 50 | 50% |
| Rs. 12 | 50 | 100 | 100% |
| Rs. 10 | 60 | 160 | 160% |
The dummy table shown above indicates that ABC’s stock is totally allocated at ₹12 per share. Therefore, ₹12 will serve as the cut-off price, and any bids made below this price will be refunded back to the respective investors.
It should be noted that the difference between the minimum and maximum values should not exceed 20%. If prices fall or exceed 20% of the initial value, trading will stop on the stock exchange until it is stable.
In initial public offerings, price bands enable firms to know what investors are ready to pay for a specified unit share of ownership in a project.
Conclusion
Price bands are essential for the market’s stability during both IPOs and regular trades. This is because establishing parameters helps to minimise volatility by restricting price movement to predetermined consulting ranges. Furthermore, investors should know how price bands work to make informed investment decisions and protect their interests in a volatile market. Additionally, depending on the particular stock or security, varying levels of flexibility can be realised at different prices, including 2%, 5%, 10%, or 20%. Therefore, pricing borders create coherence in the trade environment which is fair as well as transparent.
FAQs on Price Band
The price of an IPO is determined by the individuals involved in the sale of shares, known as underwriters. With smaller IPOs, one primary bank called a bookrunner will determine the price. Conversely, in larger IPOs, a consortium of banks will work together to set the price.
Price bands are responsible for defining the limits a security is able to move in. For instance, if a stock has a price band of 10%, this implies that it can increase or decrease by 10% from the previous day’s closing price.
A price band restricts stock trading, where there is no more than (20%) maximum limit when it comes to the lowest and highest prices within the band. For instance, this helps to safeguard against sudden shifts in prices to make sure that every day’s trading goes on undisturbed.
Investors can choose to subscribe at or above the cutoff price when seeking an IPO. If the demand for shares surpasses its supply, the chances of getting an allocation are dicey. Whereas, if bids are made at higher amounts, then the initial cut-off and the final pricing turns out to be more than that figure. Thus, allotment is guaranteed.
The lowest point of the pricing band is the floor price, which may be subject to modifications. However, it cannot go lower than the par value of equity stocks. Whereas, the cut-Off price is considered to be the offer price. The issuer company chooses this cut-off Price for a particular equity share according to its demand during an initial public offering (IPO).