When
companies are on the look out to raise money for their business operations,
they use various means for the same. Two of the most popular means to raise
money are Initial Public Offer (IPO) and Follow on Public Offer (FPO).
During the
IPO or FPO, the company offers its shares to the public either at fixed price
or offers a price range, so that the investors can decide on the right price.
The method of offering shares by providing a price range is called as book
building method
Book
building is actually a price discovery method. In this method, the company
doesn't fix up a particular price for the shares, but instead gives a price
range, e.g. USDs 80-100. When bidding for the shares, investors have to decide at
which price they would like to bid for the shares, for e.g. USD 80, USD 90 or USD 100. They can bid for the shares at any price within this range.
Based on
the demand and supply of the shares, the final price is fixed. The lowest price
(USD 80) is known as the floor price and the highest price (USD 100) is known as
cap price.
The price at which the shares are allotted is
known as cut off price