FIN 370 Week 5 - DQ 3 - 7631

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·         What is the difference between a traditional IPO and an auction-based IPO? What do the differences mean for companies and investors?

 

Answer: In a traditional IPO, investment bank underwrites the IPO.Company and investment bank decides how much capital to be raised, what should be the IPO price and how many shares to be issued through IPO. This price is usually less than estimated market value of the share. Thus, when trading begins, stocks issued in traditional IPOs frequently trade at higher price than the IPO price.

 

Auction based IPOs use the Internet to open the purchase of IPO. Generally Dutch auction is used to discover the price. Investment bank still underwrites the issue. Company decides a reserve price and no. of shares to be offered. When IPO opens, investors bid how many shares they want to purchase and at what price.

 

For companies, Auction based IPO can be more attractive. In Auction based IPO, the discovered price is closer to the market value of the share. When trading begins in the auction based shares, the market price is not very higher than the IPO price. So, we can say that most of the profit went to the company. Also, in case of Auction based IPO, company pays less fee to the investment banker.

 

For investors, traditional IPO is more attractive. Generally traditional IPO promises more return to the investors as the set IPO price is much lesser than the estimated market value of the share.