The offering price of an IPO is the price at which a company sells its shares to investors. The opening price is the price at which those shares begin to trade in the open market. The difference between the two is the amount of instant profit or loss for investors in that initial public offering of stock, and it often indicates whether IPO shares are likely to go up or down.
When a company wants to raise capital, it might offer its shares to investors in an initial public offering. The company hires an underwriter – an investment bank – that structures the IPO and solicits interest from potential investors. IPO investors purchase the shares from the company at the offering price.
Trading in the Open Market
Once an IPO is released to investors, that stock starts trading in the open market, where IPO investors can now sell their shares. The price at which the stock opens for trading is called the opening price.
Depending on the amount of interest from investors, the opening price can be higher or lower than the offering price. If the opening price is higher, the IPO investors have an immediate gain; if it is lower, they have an immediate loss.
Who Sets the Offering and Opening Prices
The underwriter sets the offering price based on the amount of capital the company wants to raise and the level of demand from investors.
The opening price is set by supply and demand. Few investors can buy an IPO at the offering price, because most shares go to the underwriter’s best institutional clients, and some are reserved for the company’s “friends and family.” So most investors' only option is to buy in the open market when the shares start trading.
The day an IPO is released, buy and sell orders pile up until they are balanced against each other, determining the opening price. If the demand for shares exceeds the supply, the shares open higher than the offering price; otherwise they open lower.
Short-Term Price Direction
The difference between the offering and opening prices can provide clues as to the stock’s near-term price direction. If the opening price is lower than the offering price, the demand for the shares is weak and the price is likely to continue to drop. If the opening price is higher than the offering price, the demand for the shares is strong and the price is likely to continue to go up.
However, with a particularly “hot” IPO, although the opening price might exceed the offering price several times, such strong demand is often unsustainable. An eye-popping opening can quickly turn into an immediate top, followed by a long and painful slide.