Price Band
What Is a Price Band?
A price band is a worth setting method where a seller demonstrates an upper and cheaper limit, between which purchasers are able to place bids. The price band's floor and cap give direction to the purchasers. This type of auction pricing technique is frequently utilized with initial public offerings (IPOs).
Understanding Price Bands
The price band is utilized during the price discovery stage of a initial public offering (IPO). At the point when a company chooses to issue shares in the primary market, it enlists the services of at least one investment bankers to act as underwriters.
The underwriter dissects factors, for example, the development forecast of the company, industry, and economy; the firm's net worth; profit per share (EPS); and numerous different parts of the company to decide a scope of prices that the security can trade for. The price range the issuer and underwriter concur upon is alluded to as the price band.
The base band is the lower limit and the top band is known as the upper limit. Deciding the price band is a critical step in book building, as it enables a firm to comprehend how much money investors will pay for an ownership stake in the firm.
When a price band is planned, the underwriter begins the most common way of building its books, which it opens by sending a draft prospectus with the price band to possible investors, like institutional investors, retail investors, and high net worth individuals (HNWI).
The book is open for a foreordained period, during which investors can submit and modify their proposals on the number of shares they will purchase at a price that falls inside the band. After the book is closed, the underwriters assess the bids to "find" the fair price of the IPO.
Illustration of a Price Band
To act as an illustration of how underwriters utilize the price band to build the books, envision a company needs to issue 10,000 shares in its IPO, and the price band is set at $35 to $42. The bids that are received from investors are:
| Bid price | Number of shares | Cumulative shares | Cumulative % of total shares |
| $42 | 2,500 | 2,500 | 25% |
| $41 | 1,500 | 4,000 | 40% |
| $40.50 | 3,000 | 7,000 | 70% |
| $39.50 | 2,000 | 9,000 | 90% |
| $39 | 1,000 | 10,000 | 100% |
| $37 | 3,500 | 13,500 | 135% |
| $36.50 | 1,000 | 14,500 | 145% |
| $36 | 5,000 | 19,500 | 195% |
| $35 | 2,500 | 22,000 | 220% |
Price bands can likewise be utilized in international trade. A country can set an upper and lower price that it will permit a decent to be sold at in the market. Assuming the price of an imported decent is below the lower price threshold, the country could tax the great until it falls back inside the price band. Protection is given by forcing a variable import levy on the imported commodity, which raises the importer's cost to the reference price.
Highlights
- Deciding the price band is critical to understanding how much investors will pay.
- This pricing technique is frequently utilized with initial public offerings (IPOs).
- A price band is a worth setting method wherein a seller demonstrates an upper and lower limit of where purchasers are able to bid.
