Price Band

Price Band Definition

The price band refers to an underlying security's fixed value range specified by the stock exchange or seller. It assists manage mass stock trading to avoid market volatility and restraints panic selling. Most stocks possess an upper and lower price limits between which the buyers place their bids. 

The stock exchange dismisses orders falling behind or exceeding the price band. If the stock rate touches the l/u price limit, orders will remain pending until the relaxation of limits. Therefore, the price band can be considered as boundaries of trading price. It is generally used during an Initial Public Offering (IPO). 

• The price band refers to a stock’s highest (cap) and lowest (floor) value range within a single trading day, usually employed during an Initial Public Offering (IPO). 
• It is set by the stock exchange or seller for the buyer or company to prevent market volatility and limit panic selling. 
• The seller rejects any orders lower or higher than the designated range of values.

Price Band Explained

The price band stipulates a border for stock trading wherein the seller allocates the buyer's highest (cap) and lowest (floor) cost limit. It averts unexpected massive stock price fluctuations. This is the cost limit for a stock to be traded during that specific day. Note that the spread between the floor and cap price must be a maximum of 20%.  

Let's discuss the two main prospects. 

1. The stock rate at the upper limit – Pending orders as bids at an upper price. Therefore no market offers or sellers. 
2. The stock rate at the lower limit – Pending orders on the offer side at a lower price, hence no market bids or buyers. 

Say the value of an underlying security increases or decreases by 20% of the opening price or during a designated time frame. Subsequently, the stock exchange would discontinue its trading for a moment till the markets are settled. It lets sellers and buyers conveniently discover each other. 

Price band identification lets a company acknowledge how much the investors wish to pay for proprietorship. In other words, this helps the firm analyze its market worth. It promotes an organized stock market atmosphere and is also called "circuit limits." 

The rate at which the IPO issue gets listed is labeled as the "cut-off price". So, for example, suppose the value limits in IPO are between $200 and $400 and it is listed at 350, then 350 is the cut-off price. 

The stock exchange regularly publishes the underlying security's lower and upper price limits. In addition, many nations set a lower and upper limits for international trade. Goods costing less than the lower price limit are subject to duties or taxes for inclusion into the range. 

The price band in IPO refers to the bidding flexibility of stock and is subject to revisions. Therefore, the bidding period must be expanded for 3-13 days upon every revision. 

As per their volatility, stocks are categorized into 5%, 10%, 15%, and 20%. Therefore, large market traders can effortlessly control the rates of small and micro-cap stocks that are put into the 5% group. 

How to Decide the Price Band?

Computation of a logical price band requires quantitative analysis, extensive research, and calculation. Therefore, companies opt for the book-building process to offer securities to several bid procedures. This assists analyze the securities' market demand and fixing an effective price band. In addition, companies often employ underwriters who study several factors related to the company and market to finalize a definitive price range built into books.

Factors Affecting the Price Band in IPO

The companies and investment bankers determine the price band in IPO, keeping the below-mentioned factors in mind. 

1. Basic complete market trend
2. Leadership and departmental set-up of the private organization
3. Quality of stocks being sold in IPO
4. Future growth capability of the company
5. The current market rate of the stocks in companies from the same sector
6. The demand for company stocks from prospective customers
7. Fiscal efficacy of the firm's business model
8. Any good news demonstrating achievements of the company

Example

Let's say a firm, ABC Ltd., issues 20,000 stocks in the IPO price band of $50-$100. Here are the bids from investors.

Bidding price	Number of stocks
$75	1500
$85	2000
$97	5000
$80	8000
$100	3000
$60	6000

The cut-off price (highest rate to sell the issue) is $85. Moreover, the total number of shares all investors wish to purchase is 25,500. Thus, 5500 shares are more than the available quantity. Consequently, ABC Ltd. won’t assign any stock to bidders lower than $85 and will reimburse their amount.

Frequently Asked Questions (FAQs)

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