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The issue price is the initial asking price for stocks and bonds. As traders interact on secondary markets, they may trade above or below the issue price, and their activities can provide feedback on how consumers are viewing the company. When prices rise, it suggests that investors are feeling confident in the company, while falling prices indicate faltering confidence and concerns about viability. The initial asking price is a matter of public record and can be determined by looking up information about the original issue.
In the case of stocks, the process of determining an issue price happens during the preparation for the initial public offering. The company will meet with prospective underwriters and investors to learn how much they think shares will be worth, based on the number of shares and the company's overall health. It will set an issue price with the goal of quickly selling out and must strike a balance between high and low pricing. Too high, and the company won't be able to sell the initial issue. Too low, and the company might not realize as much capital from the sale as it should.
Typically, the company turns the process of sales over to an underwriter. The underwriter buys up the issues at a discount price and then offers them on the open market for the issue price. It may provide special incentives to institutional investors, and often average investors cannot access the original issue, instead making their purchases when the stock enters the secondary market.
For bonds, setting the issue price involves determining how much debt the company wants to issue, and dividing it by the number of bonds. Buyers loan money to the company with their purchase, expecting interest payments and an eventual repayment of the original loan. They can sell bonds on the secondary market to recoup the investment immediately, with buyers paying slightly above or below the issue price on the basis of the kind of deal they reach with sellers.
Major offerings often attract media attention, and the issue price will be a topic of discussion. Companies offering historically high prices are often subject to scrutiny not just in the financial press, but by the mass media in general. High asking prices are indicative of confidence on the part of the company that investors will bite even though the price is high, suggesting that the company believes it is rapidly growing. If investors do not find the issues a tempting target, the underwriter can be left holding unsold issues it must try and unload without losing out on the transaction.
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