What does book making in an IPO mean?

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william1941 | College Teacher | (Level 3) Valedictorian

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When the shares of a company are offered to the public for the first time, the underwriter has to determine a price based on the assets of the company and the expected future earnings, at which it would be able to sell the shares of the company to the public.

Instead of choosing a fixed price, this is usually done by choosing a band, within which offers are considered if they are made. Depending on the number of applications received at each price, the underwriter can determine the highest price at which it is possible to sell all the shares it intends to. This is called the book building process. It allows the shares of the company to be sold at the best price possible depending on the interest shown by the prospective investors and help the company garner the most funds.

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