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Typically, when a business holds its preliminary public offering (IPO), a financial investment bank will purchase all or much of that company's shares straight from the business. Subsequently, as a proxy for the business holding the IPO, the investment bank will sell the shares on the market. Need More Info? makes things a lot easier for the business itself, as they successfully contract out the IPO to the investment bank.
In doing so, it likewise takes on a substantial amount of danger. Though skilled analysts use their expertise to accurately price the stock as finest they can, the financial investment bank can lose money on the offer if it ends up it has overvalued the stock, as in this case, it will frequently need to offer the stock for less than it at first paid for it.
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Pete, the owner, contacts Jose, an investment banker working for a bigger financial investment banking company. Pete and Jose strike an offer in which Jose (on behalf of his firm) concurs to buy 100,000 shares of Pete's Paints for the business's IPO at the rate of $24 per share, a price at which the investment bank's analysts arrived after cautious factor to consider.
4 million for the 100,000 shares and, after submitting the proper paperwork, starts selling the stock for $26 per share. Yet, the investment bank is unable to offer more than 20% of the shares at this rate and is forced to minimize the rate to $23 per share in order to sell the remaining shares.
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36 million [( 20,000 x $26) + (80,000 x $23) = $520,000 + $1,840,000 = $2,360,000] To put it simply, Jose's firm has lost $40,000 on the deal since it misestimated Pete's Paints. Investment banks will frequently complete with one another for protecting IPO tasks, which can force them to increase the rate they want to pay to secure the handle the business that is going public.