What Factors Affect the Price of an IPO?

Many factors determine the price of an initial public offering (IPO), ranging from a company's marketing prowess to investor sentiment. Investor demand certainly plays into the price of an IPO before and after that new issue is traded. Before the launch of a new stock, companies and investment bankers go to great lengths to promote the prospects of the new issue and will often set a price range based on the reception that institutional investors give that company. After the stock begins trading in the public markets, equity market and economic factors drive the price of an IPO.

The financial history of a company in addition to its profit-earning potential for the future affect the price of an IPO. Investors reward a stock in large part based on the revenue and profitability picture at the organization. A company that enters the financial markets already generating profits hand over fist is likely to make a huge splash during the debut trading session. On the other hand, a smaller company that poses more risk to investors might not command such a high price for an IPO. The new issue market can be cyclical to where investors are willing to take on risk commensurate with recent performance in IPO stocks.

The way that a new issue is marketed and publicized affects the price of an IPO. On the marketing side, this is typically the responsibility of a company's management team and the investment bankers who are involved in the deal. To market a new issue, the teams may embark on a traveling road show, where the merits of the new stock are discussed with potential investors. The reception that the teams receive in addition to any financial commitments are sure to influence the way that a new issue is priced. For instance, the more confidence that bankers and company executives have that investor demand is healthy, the more reason exists to set the price of an IPO high.

Publicity is another component that affects the price of an IPO. This reflects the amount of media hype that surrounds a new issue. When news of a new stock hits the mainstream media, it can notably increase demand for the IPO. Small investors gain opportunities to hear how financial experts are sizing up the new issue and may begin asking other market professionals, such as stockbrokers, how to gain access to the IPO. The result could be a higher-priced IPO.