What is Price Band & how it works?

Key Highlights

• A price band is a method used for value setting that enables the seller to specify upper and lower limits for buyers.
• In the case of initial public offerings, this pricing technique is often used.
• Determining the price range is essential to understanding how much investors would like to invest.

Understanding Price Band Meaning

The price band establishes boundaries for stock trading and is set out in the price band. Where the seller allocates the highest cap and the lowest floor cost limit to the buyer. It's supposed to prevent sudden sharp fluctuations in stock prices. For a stock to be traded on that particular day, this is the price limit. Note that the spread A maximum of 20% shall be allowed between the floor price and the ceiling price.

The identification of price bands allows the company to determine how much the investors want to pay to own the business. This can be seen as a means of helping the firm evaluate its market value. It's a way of promoting an orderly atmosphere in the stock market, and it's also known as circuit limits.

The IPO price band reflects the flexibility of stock bidding, which is subject to revision. Consequently, on each revision, the tender period should be extended by 3-13 days. The stocks are divided into five, ten, fifteen, and twenty percent as a result of their volatility. The rates of small and microcaps can, therefore, be easily controlled by large market operators. Those stocks that are part of the 5% group.

Factors Affecting Price Band in IPO

The companies and investment bankers determine the price range for the initial public offering, considering the following factors.

1. The basic trend of the entire market.
2. Leadership and departmental set-up of the private organisation.
3. The quality of the stock that traded in an initial public offering.
4. The company's ability to grow over the next few years.
5. The current market rate of stocks in companies from the same sector.
6. The demand of prospective customers for company stocks.
7. The fiscal efficiency of the company's business model
8. Positive news of any kind shows the company's success.

How Does the Price Band work?

The seller assigns the highest (cap) and lowest (floor) cost limits, and this range sets the trading boundaries for stocks. Large price swings in stock prices are being avoided. This is the cap on the stock price that can be exchanged on any particular day. Keep in mind that the floor should at least equal 20% of the cap costs. There are primarily two possibilities in this regard:

The stock price at the upper limit No offers or sellers are present in the market since every pending order is bid at the upper price.

The stock price at the lower limit There are no market bids or buyers because the price of all the orders that are pending on the offer side is lower.

With an example, we can see this in more detail. Let's assume that, within a certain period or by 20% of the starting price, the value of the security will decrease or increase. So, until markets settle, the stock exchange will shut down. It's a convenient way to connect buyers and sellers. It helps the company know how much an investor is willing to spend on proprietary information. In the simplest terms, it helps a company assess its market value. In addition, it supports the atmosphere of an organised stock market, which is known as circuit limits.

How is the Price Band decided?

Extensive calculation, research, and qualitative analysis are needed in order to compute a practical range. For that reason, firms are choosing the book-building method when offering shares under different tender procedures. This will allow a rational price band to be established in order to assess market demand for stocks. Furthermore, to assess different market factors and company characteristics in order to determine a definitive value range, companies often make use of underwriters.

Conclusion

The price band plays a significant role in shaping market reputation and demand for a corporation's shares. Investors will gain insight into the company's prospects and can make flexible offers within price ranges. After that, companies will decide on the cut price when they analyse bids submitted by investors and determine if they meet their respective shareholdings. By verifying the discount and subscription rate, you can get an idea of market demand for a company. You must ensure that your offer is close to the cap price if you wish to have a bid approved for an initial public offering. On the other hand, if you want to invest in the latest IPOs, then check out the Kotak Securities website.