What Is a Public Offering Price (POP)?
The public offering price (POP) is the price at which new issues of stock are offered to the public by an underwriter.Because the goal of an initial public offering (IPO) is to raise money, underwriters must determine a public offering price that will be attractiveto investors. When underwriters determine the public offering price, they look at factors such as the strength of the company's financial statements, how profitable it is, public trends, growth rates, and even investor confidence.
Key Takeaways
- The public offering price (POP) is the price an underwriter sets for new issues of stock sold to the public during an initial public offering (IPO).
- Underwriters look at a variety of factors when setting the public offering price, such as the profitability of the company, the strength of its financial statements, growth trends, and investor confidence.
- Underwriters need to set a POP that is low enough to attract the attention of investors, yet high enough to ensure the company raises a satisfactory amount of money through the new stock issue.
- Some qualitative factors—such as the public's perception of a company or the desire to invest in the next hot tech company—can sometimes push the share price beyond the public offering price, particularly during the early days of an IPO.
Understanding a Public Offering Price (POP)
Investors and analysts sometimes use the POP price as a benchmark against which a stock's current price can be compared. If a company's share price rises significantly above its initial public offering price, the company is considered to be performing well. However, if the share price later dips below its initial public offering price, this is considered a sign that investors have lost confidence in the company's ability to create value.
A public offering price does not necessarily reflect what the shares are worth. Investors can get overly excited abouta hot new company and push priceshigher than the stock should be. By using the balance sheet information contained in the prospectus, prospective investors can calculate an accurate share value to help determine whether the market has correctly priced an IPO.
The Underwriting Process
It's the underwriting company's job to evaluate the company interested in an IPO to determine an optimal public offering price. The underwriter must take many variables into consideration during this process. First, the public offering price must accurately reflect the current and potential near-term worth of the underlying company. The underwriter will need to undertake a thorough review of the company's financial statements, which includes the balance sheet, income statement, and cash flow statement.
Additionally, the underwriter will need to set a POP that is high enough to ensure the company raises a satisfactory amount of money through the equity issue. Lastly, the POP must be low enough to attract the attention of investors and motivate them to buy shares of the new offering.
Some company founders and early investors see the IPO as part of their exit strategy, enabling them to reap the rewards of their efforts to build a startup company from scratch.
How to Research Public Offering Prices
The main way to research an IPO price is to contact the underwriting bankfor the offering and geta copy of the prospectus. Find the financial data contained in the prospectus. Locate the balance sheet and find the stockholder’s equity section. Look for the amount under the “paid-in capital” heading, which is the money the company has received from the sale of IPO stock.
As an example, let’s say the balance sheet reports $500,000 as the amount of paid-in capital.Locate the number of shares the company has sold in the stockholders' equity section. Divide the paid-in capital by the number of shares sold to get the value of one share of stock. For example, if the company has sold 25,000 IPO stock shares for $500,000, you would divide the $500,000 paid-in capital amount by the 25,000 shares to arrive at a $20-per-share book value.
Special Considerations
You should also consider qualitative factors when judging a public offering price. For example, market perception can assign a higher value to a high tech company over a new breakfast cereal companybecause investors are more attracted to high tech. An IPO company can alsohire a well-known board of directors, which gives the appearance that competent professionals lead the company. However, whilequalitative factors can increase or decrease the market’s perception of what the stock is worth, the actual book value remains unchanged. Investors must decide for themselves if anIPO stock is worth the POP.
