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How is an IPO Priced?

IPO is a means for a company to raise money from the general public. We, as a part of the general public, often ignore the process involved in the pricing of an IPO. This presentation will give you a clear idea of how an IPO is priced.<br>You can look for an upcoming IPO(https://www.edelweiss.in/new-issues/ipo-listing) on your broker's website.<br>

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How is an IPO Priced?

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  1. How is an ipo priced?

  2. Introduction IPO or Initial Public Offering is a process where a privately held company offers its shares for purchase to the general public. The price of shares or stocks to be sold has to be determined before launching an IPO

  3. Factors that affect the cost of an ipo The current cost of shares that are similar to the organisation in the industry Number of stocks being sold in an IPO The financial performance of the said organisation over the past certain years Demand from potential customers for the stocks being sold Market trend The potential growth rate of the company

  4. Valuation of stock prices • Two approaches are used for the valuation of stock prices: Relative Valuation Approach:In relative valuation approach, the firm’s value is compared with its competitors in the industry to understand the financial worth of the business. Investors may also use this approach to estimate if the stock is worth purchasing. Various trading multiples and ratios like price-to-earnings (P/E), free cash flow, Enterprise Value (EV), etc. are applied for calculation. When compared to the absolute valuation approach, the relative model uses benchmarks, ratios, and averages to estimate the company’s value. This said benchmark could be determined by carrying out broad industry analysis and calculating an average. Absolute Valuation Approach:In absolute valuation approach, the present value of the business or company is determined by estimating the future income sources using Discounted Cash Flow (DCF) analysis. This calculation is done with the help of financial statements of the company and books of accounts to understand the worth of the business. The future cash flow of the company is forecasted with DCF analysis which is then discounted to the present value of the firm to get the absolute value. But this approach does not involve any comparison between similar companies in the industry or sector which could be a drawback of this model. Another challenge faced in absolute valuation approach can be forecasting the future cash flow of the business and estimating it correctly.

  5. Conclusion Thus, you as an investor, can now correctly estimate and understand the valuation of an Initial Public Offering made by a company or firm. Due to this, you can determine the IPO pricing accurately before investing your money and buying the shares. But it is advised to heed caution before choosing to purchase any upcoming IPO and go through the prospectus and other papers thoroughly.

  6. THANK YOU

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