How is an IPO valued? & Various factors influencing IPO Valuation

In this article, We will discuss in detail the entire process of IPO valuation & various types of IPO.

How is an IPO valued?

An IPO Valuation is usually done according to the rate of demand and supply existing in the Trade Market. Usually, IPO is sold at a certain price which the buyer is willing to purchase at.

ipo valuation

Although the process sounds very simple if the IPO is under-priced, then there is a higher chance of the gains and profits being pocketed over a long period. The contrary is also possible which means that if they are overpriced, then the chances of gaining is much less.


Usually, the stock prices of different businesses are valued using different techniques. The techniques involved consists of:

  • Factoral Analysis which have an impact on the pre -IPO valuation.
  • Another technique is that of absolute valuation.
  • There also exists relative valuation.

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Factors influencing IPO Valuation

There are various factors which also influence the pre-IPO valuation. Certain factors which affect and influence the price are as follows

  • One of the factors includes the amount and quantity of stocks which are being sold in the IPO
  • Another important factor which influences the price is the organizational structure of the private company.
  • Another important factor which affects is the price of the stocks currently of similar based companies in the same format or sector.
  • The growth potential of a company is also a factor to be considered.
  • The financial effects of the company and also its business model does play as an important factor.
  • Lastly, the most important factor being the demand for the stocks from potential customers.

What are the Different Types Of IPO?

Usually, companies opt for an IPO when they want to further their business or growth. When a company wants to raise the potential amount of capital for different purposes, they opt for IPO. How IPO basically works is that the company sell their securities to the public.

How this works is that by purchasing the securities the public gains equity while the company gains capital. When the company makes a fortune, the public gets to have a share from this fortune depending on the number of shares held by them. The relationship all in all is mutually beneficial. There are two types of IPO:

Fixed Price IPO Issue

In case of the fixed price issue as the name suggests the price is fixed in advance. The company along with its underwriters evaluate all the assets, liabilities of the company before fixing the price.

The price which is fixed by the company is done in a way to achieve the targeted funds. The price is then printed out in the order document. The order document is important as it helps in evaluating and justifying the price using the qualitative and quantitative factors.

Book Building IPO Issue

The book building Issue is still a concept which is new to India, unlike the developed countries. In this case, the price is usually determined during the whole process of IPO. Unlike the fixed price issue the book building issue does not have a fixed price.

Although there is no fixed price, there is a price band. The share prices are fixed depending on the bids. The floor price is the name given to the lowest price in the price band and cap price is the name given in case of highest price.

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IPO for Beginners – Guidelines for Beginners Investing In IPO

Few of the basic points to remember for beginners dealing with IPO Investment are:

  • Know Yourself: This is one of the basic guidelines for anybody who wants to deal with IPO. The person should know themselves before dealing with this. Why they would require an IPO, what are the further plans which need to be achieved with the help of the IPO can only be known by the person wanting to use it.
  • Don’t Bite Off More than You Can Chew: This is an important phrase. No person or company should bite off more than they can chew. The company nowadays just to make a profit enter the trade market and float their shares publicly without having a proper plan which is why they end up in losses. Therefore, a company should only invest in an IPO if it is capable and are sure that it will be helpful for the company.
  • Another basic guideline for beginners is that if a person wants to apply for shares, then they should possess a demat

To conclude it can be seen from the above discussion how to value an IPO and also what are the basic guidelines for beginners before they get into the dealing with IPO. If dealt with properly IPO is beneficial in the long run.

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