If you want to subscribe to an initial public offering (IPO) of a company, you need to understand the concept of “cut off price.” But before that, let us understand IPO’s meaning.
When a company issues its shares to the public for the first time, it is known as an IPO. Now, let us answer this question: What is the cut off price in an IPO?
During an IPO, companies allot shares to investors either at the cut off price or above the cut off price. Suppose a company has announced its IPO and its underwriters have given a price range of Rs. 90-100 a share for investors to place their bid.
Let us say that you have placed a bid at Rs. 92. It turns out that the company decided Rs. 92 as the issue price or the cut-off price. Since you had placed a bid at Rs. 92, you will be allotted the shares.
However, if you had placed a bid at Rs. 91 and the company had decided Rs. 92 as the cut-off or issue price, then you would not have been allotted any shares.
Key factors that impact the cut off price of an IPO
- Conditions in the stock market: The overall conditions in the stock market is one of the most important factors affecting the cut off price of an IPO. If the conditions are bullish and people are buying a lot of shares, the cut off price can be decided closer to the upper limit of the price range of an IPO. However, if the conditions are bearish and people are reluctant to buy shares, then chances are high that the cut off price will be determined closer to the lower limit of the price range.
- Supply and demand: The forces of demand and supply dictate the cut off price of an IPO. If the demand for a company’s IPO is higher than the supply of its shares, then the cut-off price can be high. However, if the demand is lesser than the supply, the cut office is most likely to be low.
- Company performance: When an investor subscribes to an IPO, he expects the issuing company to perform well. To examine this, he has to analyse its past performance in terms of its sales, profit, assets, liabilities, and cash flows. But, past performance may not be the best indicator always. Hence, he also has to assess how the company will perform in the future based on its past performance. If a significant number of investors expect a company to perform well, it drives up the cut off price, and vice versa.
- Industry performance: Investors also analyse the performance of the industry to which an IPO-issuing company belongs. If it is a high-growth industry, then more people will be willing to invest in the company. Hence, the cut-off price will be on the higher side. However, if an industry is not growing at a high rate, few people will be willing to invest in the IPO, thereby decreasing the cut off price.
- Company Management: Last but not least, the management of an issuing company has a huge impact on the cut off price of its IPO. If an issuing company’s management has a solid track-record, then more people will be willing to invest in its IPO, which can drive up its cut off price, and vice versa.
Conclusion
It is not tough to understand what the cut off price in an IPO is. However, it is important to get a grip on the factors impacting it, particularly when you want to subscribe to an IPO. If you understand what affects an IPO’s cut off price, you can invest wisely in such offerings.
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