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Underpricing | Open Access Journals
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Business and Economics Journal

ISSN: 2151-6219

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Underpricing

Underpricing is the practice of listing an initial public offering (IPO) in the stock market at a price below its true value. When a new stock closes its first trading day above the set IPO price, the stock is deemed to have been undervalued. Underpricing is short-lived, as competition from buyers would drive the price up to its true value. An initial public offering (IPO) is the introduction at a stock exchange of a new stock for public trading. Its purpose is to raise equity for the company's future growth. Determining the price for the offer requires consideration of many factors. Quantitative considerations are first considered. These are the figures on cash flow, actual and expected. Nevertheless, two opposing goals are at play. The company's executives and early investors want the shares to be priced as high as possible to raise the most capital and reward themselves the most lavishly possible. The investment bankers who advise them may hope to keep the price low so as to sell as many shares as possible, as higher volume means higher trading fees for them.

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