No stock investor wants to overpay for shares in an IPO issue. These significant factors affecting IPO valuations can help you for pricing an issue.
Once you can identify these factors, you can easily identify cheaper IPOs from costly IPOs. Initial Public Offerings (IPOs) are considered best for investors only if its valuations are realistic.
According to a post published in Forbes, IPO pricing does not always represent intrinsic value and some companies fail to draw interest initially.
You need to analyze whether current valuation make sense given the opportunity? How realistic is the valuation given the company’s growth prospects?
Generally, high-quality companies are known to have premium valuations. However, when such companies stumble or hit by negative surprises, its valuations will also be punished. It is perhaps true in the short term scenario.
But, investors should not be afraid to pay a premium for a high-quality business. You should focus on high-quality companies at reasonable stocks valuation. Here are 10 significant factors determining or impacting share price in IPO:
[You can also watch an exciting video on this post from GetUpWise channel on YouTube.]
(1) Demand & Supply
It is one of the most common factors affecting IPO valuations. A strong demand is necessary to boost the sales of a commercial product & service. Similarly, a strong demand of shares of an IPO issue from investors can boost its valuations.
This demand can arise from small or retail investors to even large institutional investors or ultra-high-net-worth individuals. A strong demand will lead to a higher IPO price.
But, a strong demand does not mean that the company is more valuable. It indicates a higher valuation for the company. A company with higher valuations leaves little space for listing gains.
On the other hand, a lower then expected demand can force a company to reduce IPO valuations. Sometimes, they can even postpone the IPO issue until the return of favorable conditions.
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