Although IPO processes are similar to each other in terms of dynamics such as price fluctuations, market reactions, investor interest, and company excitement, it is known that there are different types of IPOs. There are generally two basic IPO processes.
These two types are called Fixed Price IPO and Book Building IPO. Both models have features that make them more advantageous or riskier than each other. It will be useful for investors to understand the differences between these two models for the most profitable portfolio management.
Therefore, you should also know the differences between types of IPOs while exploring IPO investment opportunities in order to optimize investment processes in the best way. It is crucial to understanding IPOs in financial markets nowadays.
What Are the Main Types of IPOs?
There are generally two models applied in the IPO process, where a company makes its private and closed status public and offers partnership through stocks. There are some risk factor differences between these two types of IPOs, called Fixed Price IPO and Book Building IPO.
Companies usually choose one of these two models according to their IPO strategies and investor base. When deciding which method to use to manage the IPO process, a company should look at consultant recommendations and market conditions.
Factors such as the scale at which a company operates, the amount of capital it targets and other financial plans, and the special conditions of the market it wants to enter affect which IPO model companies should prefer.
Companies that consider these elements together determine which is suitable for them between Fixed Price IPO and Book Building IPO. BlueSuisse is a platform that brings you one step closer to your financial goals and allows you to be an active participant in the stock markets or other IPO market trends for investors.
What Is a Fixed Price IPO?
One of the most common IPO processes, fixed price IPO, is a type of IPO where the share price is determined by the decision of the company's board of directors, depending on the supply-demand balance that is shaped by the interest of investors when the share price is opened to the market.
In this process, the company usually determines a price before the IPO process and investors buy shares at this fixed price. This model is more predictable for market participants, but problems may occur in cases where investor demand is low.
Today, the IPO model preferred by small and medium-sized companies traded in stock markets is the fixed price IPO, as this model is more suitable for companies of this size to create capital.
What Is a Book Building IPO?
In another popular IPO model, book building IPO, the reaction of investors is usually the main determining factor. Companies usually determine a price range in this model. For example, a company determines the price of its stock between $30 and $40.
Then, when it goes public, if the interest of investors is high, this price tends to balance closer to $40, and if the interest is low, it tends to balance closer to $30. At the end of the book building period, the most ideal and suitable price is determined.
Understanding the dynamics of the stock market and within the scope of the "book building process for new investors", IPO processes can be managed better with this model.
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Key Differences Between Fixed Price and Book Building IPOs
When comparing Fixed Price vs Book Building IPOs, it should be known that there are some fundamental differences between them. The most important "Difference between fixed and book building IPOs" examples for investors can be listed as follows:
- In Fixed Price IPO, the price is determined in advance and fixed, while in Book Building IPO, it is determined during the demand collection period.
- Transparency offered at a high level for Book Building IPO.
- While there is a margin of human error in the pricing processes in Fixed Price IPO, a balanced price is formed according to demand in the book building IPO model.
- Fixed price IPO process is less flexible for companies and investors
A company should carefully examine this "fixed price vs book building" comparison before starting the IPO process. It should determine which model is more suitable for them.
Which Type of IPO Is Better for Investors?
There is no single answer to determining which type of IPO is more suitable or better for investors. Investors with low market knowledge may feel more secure in the Fixed price IPO model. However, book building IPO may require more understanding of market dynamics.
Because fair pricing and transparency are higher in this model. Which type of IPO is better varies depending on the investor's financial goals and market knowledge. However, for the question "How IPOs affect retail investors?"
It is useful to remember that the book building IPO model may be more competitive and may require experience in the market. So should forex traders consider IPO investments? If you can meet the answer for how to evaluate an IPO as a retail investor, you can start your IPO journey.
How Is Pricing Done in Each Type?
We know that there are basically 2 models within the scope of "IPO pricing strategies explained". A company can usually apply 2 different models in determining the stock price during the process of offering its shares to the public.
The most popular of these is the fixed price IPO model. In this model, the stock price is decided together with the company's board of directors, financial advisors, lawyers and industry professionals.
However, in the book building IPO model, a range such as 20-30 dollars is usually determined. However, the real and ideal price is shaped according to the reactions of investors in the market. Investors' offers are taken into consideration.
Experts who are familiar with the stock markets generally claim that the book building IPO model provides a more market-oriented pricing. Investors can improve their financial literacy by comparing this process with other markets, such as the "IPO vs forex trading" comparison.
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