Book building is a process used in initial public offerings (IPOs) to determine the demand for a company's stock and to set the price at which the stock will be offered to the public. The process involves the investment bank or underwriter that is managing the IPO working with potential investors to gauge their interest in the company's stock and to set a price range for the stock.
The book building process begins with the underwriter issuing a prospectus, which is a document that outlines the details of the company's business, financial performance, and the terms of the IPO. The prospectus also includes the price range for the stock and the number of shares that will be offered to the public.
Once the prospectus is issued, the underwriter begins soliciting interest from potential investors. This typically involves reaching out to institutional investors, such as mutual funds, pension funds, and hedge funds, as well as high-net-worth individuals. The underwriter will ask these potential investors how many shares they are interested in purchasing and at what price.
Based on the responses from potential investors, the underwriter will build a "book" of orders for the company's stock. This book will show the demand for the stock at different price points, allowing the underwriter to determine the optimal price range for the stock.
Once the book is complete, the underwriter will set the final price for the stock based on the demand and the company's financial performance. The stock is then allocated to the investors who placed orders, with the largest orders getting filled first.
Book building is a common method for pricing and allocating stock in IPOs, as it allows the underwriter to determine the demand for the stock and to set a price that reflects this demand. It also allows the underwriter to allocate the stock in a way that is fair to all investors and ensures that the IPO is successful.
Overall, book building is an important part of the IPO process and helps ensure that the price of a company's stock reflects the demand for it in the market.