Price Band

Price Band

A price band is a value-setting method in which a seller indicates an upper and lower cost limit, between which buyers are able to place bids. Once a price band is formulated, the underwriter starts the process of building its books, which it opens by sending a draft prospectus with the price band to potential investors, such as institutional investors, retail investors, and high net worth individuals (HNWI). As an example of how underwriters use the price band to build the books, imagine a company wants to issue 10,000 shares in its IPO, and the price band is set at $35 to $42. If the price of an imported good is below the lower price threshold, the country could tax the good until it falls back within the price band. The highest price at which the company is able to sell its issue is $39, and this price is set as the cutoff price.

A price band is a value-setting method in which a seller indicates an upper and lower limit of where buyers are able to bid.

What Is a Price Band?

A price band is a value-setting method in which a seller indicates an upper and lower cost limit, between which buyers are able to place bids. The price band's floor and cap provide guidance to the buyers. This type of auction pricing technique is often used with initial public offerings (IPOs).

A price band is a value-setting method in which a seller indicates an upper and lower limit of where buyers are able to bid.
This pricing technique is often used with initial public offerings (IPOs).
Determining the price band is critical to understanding how much investors are willing to pay.

Understanding Price Bands

The price band is used during the price discovery stage of an initial public offering (IPO). When a company decides to issue shares in the primary market, it hires the services of one or more investment bankers to act as underwriters.

The underwriter analyzes factors such as the growth forecast of the company, industry, and economy; the firm's net worth; earnings per share (EPS); and many other aspects of the company to determine a range of prices that the security can trade for. The price range the issuer and underwriter agree upon is referred to as the price band.

The bottom band is the lower limit and the top band is known as the upper limit. Determining the price band is a critical step in book building, as it enables a firm to understand how much money investors are willing to pay for an ownership stake in the firm.

Once a price band is formulated, the underwriter starts the process of building its books, which it opens by sending a draft prospectus with the price band to potential investors, such as institutional investors, retail investors, and high net worth individuals (HNWI).

The book is open for a predetermined period, during which investors can submit and revise their offers on the number of shares they are willing to purchase at a price that falls within the band. After the book is closed, the underwriters evaluate the bids in order to "discover" the fair price of the IPO.

Example of a Price Band

As an example of how underwriters use the price band to build the books, imagine a company wants to issue 10,000 shares in its IPO, and the price band is set at $35 to $42. The bids that are received from investors are:

Bid price

Number of shares

Cumulative shares

Cumulative % of total shares

The company is issuing only 10,000 shares, but total bids of 22,000 shares have been submitted. The highest price at which the company is able to sell its issue is $39, and this price is set as the cutoff price. All bidders below $39 on the price band will have their money refunded and will not be allocated any shares. Bidders who submitted prices at $39 or more will receive shares for $39.

Price bands can also be used in international trade. A country can set an upper and lower price that it will allow a good to be sold at in the market. If the price of an imported good is below the lower price threshold, the country could tax the good until it falls back within the price band. Protection is provided by imposing a variable import levy on the imported commodity, which raises the importer’s cost to the reference price.

Related terms:

Auction

An auction is a sales event where buyers place competitive bids on assets or services. Read the pros and cons of buying and selling through auctions. read more

Best Bid

"Best bid" refers to the highest quoted bid for a particular security among all bids by competing market makers and participants. read more

Book Building

Book building is the process by which an underwriter attempts to determine the price at which an initial public offering (IPO) will be offered. read more

Bought Deal

A bought deal is a securities offering in which an investment bank commits to buy the entire offering from the client company. read more

High-Net-Worth Individual (HNWI)

"High-net-worth individual" (HNWI) is a financial industry classification to denote an individual with liquid assets above a certain figure. read more

Initial Public Offering (IPO)

An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. read more

Issue

An issue is the process of offering securities to raise funds from investors. read more

Offering Price

An offering price is the per-share value at which publicly issued securities are made available for purchase by the investment bank underwriting the issue. read more

Price Discovery

Price discovery is the process of setting the spot price, but most commonly the proper price, for a security, commodity, or currency. read more

Primary Market

A primary market is a market that issues new securities on an exchange, facilitated by underwriting groups and consisting of investment banks. read more