Book building is essential for building a company’s institutional investor meeting (IIM). The IIM aims to attract new potential investors willing to buy shares. Book building helps companies avoid price fluctuations when they list on the market. It enables companies to determine how much demand there is in the stock market, which will allow them to be more realistic when it comes to setting prices for their stocks.
Less well-known companies usually use book building to gain extra knowledge about investor interest before listing, in case they would like to use other forms of private or pre-IPO sales.
What is book building?
To explain the process, let’s imagine that ABC Incorporation has decided to list on the stock exchange. ABC Incorporation might decide to employ book building because they want to gauge interest in their shares before going public and selling them.
In a book-building process, a bank is brought in as an intermediary who announces that it will sell a certain number of shares for a price within a range of prices at a later date. The firm does not set a fixed price but instead sets a minimum and maximum share price, which is acceptable to potential buyers under the book-building process. Bank staff then finds those interested in buying these shares from ABC Incorporation. At this stage then, potential investors express their interest by indicating what quantity they would like to buy at each approved price within the range.
If the demand is high, the company can price its shares higher than the minimum price-and if there isn’t enough interest (or the expected interest is not as high as predicted), they may lower their expectations. They are trying to gauge market reaction before they go public with it. This way, once shares are made available for trading on the stock exchange, ABC Incorporation will already have an idea of where best to set prices so that issuers can see maximum returns and investors can purchase shares at reasonable costs without losing too much money in investment opportunities.
Individual investors and book building in Asia
Individual investors are increasingly being invited to join the A-share market in China. While historically, only professionals have been able to participate via Qualified Foreign Institutional Investors (QFII), that is now changing due to reforms introduced over the past few years.
A key change brought by regulators was allowing individual investors into these markets. However, it is also true that QFII quotas for Hong Kong and Singapore remain well below what many had expected before they were initiated in 2012 and 2013, respectively.
Changes to how companies in the region approach their primary listings will help boost liquidity and trading volumes in particular shares and smooth out some of these imbalances. But when it comes down to where individual investors invest their money, you need to look at the incentives they receive from a company.
Technology and internet-based companies generally have strong fundamentals, but this sector is also volatile. If you invest through book building or some other process that creates an “institutional price” for the company’s shares before trading begins on an open market, you will be able to buy these kinds of firms without worrying about constantly checking share prices during the day.
Individual investors can use book building to make their applications for an IPO through an investment bank. The book-building model enables the price of shares to be determined “on the fly” based on investor interest rather than predetermined by underwriters or company executives, and this makes it much easier for individual investors to apply for shares in an initial public offering because they do not need vast amounts of capital or experience with financial markets. New investors should use an experienced and reputable online broker from Saxo capital markets before starting their investment journey.