IPO Cut-Off Price: How to Navigate This Crucial Step

Investing in an emerging IPO is an exhilarating experience for investors willing to travel along with the company right from the early phase of growth.

However, one must know some fundamental concepts to make better investment decisions: the IPO cut-off price, which is the crux of this article relating to its significance in an IPO and how investors can use it better in their favor to secure shares.

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A Bit on the IPO Cut-Off Price

When a company is about to go public, it establishes a price range for investors to bid for the shares. The price range is fixed according to many factors, including financials of the company, trends within the industry, and demand from the investors.

The cut-off price in an IPO is, therefore, the final price at which shares are allocated to investors. The cut-off price, determined based on the bids received in the IPO subscription process, represents the price per share at which the maximum number of shares can be allotted in consideration of the overall demand of investors.

Steps of How the Cut-Off Price Works:

Price Band Announcement- The company going public announces a price band, generally in a range (e.g., ₹100-₹120 per share). Bids shall be placed by investors within the price band.

Investor Bidding- Retail investors, institutional investors, and high-net-worth individuals bidding for shares at different prices within the given price range.

Book Building Process- The demand for shares at different price points is analyzed, and accordingly, the IPO price is finalized.

Determining the Cut-Off Price- The price where maximum demand lies, so that the optimal allocation occurs at this price level, is determined to be the IPO cut-off price.

Share Allocation- Those who’ve opted for cut-off price investors will get the shares at the finalized IPO price, while those who’ve participated by bidding less than the cut-off price might not get allotment.

Advantages of Bidding at the Cut-Off Price

Higher Probability of Allotment − Since the final price is unknown at the time of bidding, investors choose this price, it guarantees the chance to buy shares at that price.

Avoids Underbidding Risks – An investor may place a bid within the limits and end up losing. This is because if the final price would be higher than what he/she bid, that investor would receive nothing; hence, risk is eliminated when opting for cut-off price.

Flexibility in Allotment – No need now to guess the right bid amount, but just go for the cut-off price, which simplifies the procedure for retail investors to participate in an IPO.

How to Apply for an IPO at the Cut-Off Price?

These are the steps that investors can take to bid at the cut-off price for an upcoming IPO:

Choose a Reputable Brokerage Platform – Use an online brokerage service, as well as a bank’s IPO for investment.

Choose the target IPO – From the list of IPOs available, choose the one to apply for.

Enter Bid Details – Choose instead of entering an exact bid price, the option Cut-Off Price while applying.

Enter Lot Size – Decide on the number of shares to bid for, keeping in mind minimum and maximum limits on application.

Confirm and Submit – Review the application for confirmation of the bid.

Await Allotment Results – After the closing of the subscription period of the IPO, the announcement regarding allotment status would be made, informing the investor whether he/she has received shares.

Factors Determining IPO Cut-Off Price

Thus, the cut-off price for an IPO depends on various factors:

Market Demand – More shares result in a higher cut-off price without doubt.

Institutional Bidding Patterns – Generally, the final picture depicts how large institutional investors would have a role in determining the price.

Company Performance along with Trends in Industry – The cut-off price may move upwards or down according to the financial status of the company and its market prospects.

Economic Conditions – The entire economy, as well as the market conditions, determine how interested the investors would be, and with that, the cut-off price.

Conclusion

This is when it becomes important to gain an understanding of the IPO cut-off price for retail investors intending to enter an upcoming IPO. Such are the cut-off price options that would increase allotment chances while exposing the investor to fewer risks in the event of underbidding.