Fully Subscribed (IPO) - Explained
What is a Fully Subscribed IPO?
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Table of ContentsWhat is a Fully Subscribed IPO? Why is a Fully Subscribed IPO Important?Fully Subscribed: ExampleAcademic Research on Fully Subscribed
What is a Fully Subscribed IPO?
Fully subscribed refers to the position which an actual stock offering or bond finds itself in once all shares of an offering has been guaranteed or purchased by an investor. Here, an underwriting firm usually facilitates the initial transaction processes on behalf of the company which is is making their first initial public offering (IPO).
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Why is a Fully Subscribed IPO Important?
A fully subscribed offering is what every company that is running an IPO wishes for. Being fully subscribed means that the firm has no leftover shares which it'd love to sell after they transition to a publicly-traded company. Also, it implies that a firm doesn't possess any shares which they'd need to cut prices on in an attempt to get investors. Before price is tagged on a stock or bond offering, underwriters must first research and decide what amount of money a unit of stock would sell for.
This is usually done by analyzing different factors, but the most basic way of accomplishing this is by getting some information and opinions from investors before the IPO. Underwriters basically have the power to determine what they'll charge for a stock offering asides the opinions of interest investors, but this path is to be treaded carefully to avoid anything apart from being fully subscribed.
For example, if price is too high, the amount of shares that will be purchased wont be up to standard.This is known as being undersubscribed. Also, if the price is too low, investors would pounce on the shares, making it impossible for everyone to get enough, thus leading to increasing demand and outbidding by some investors. This situation is known as being oversubscribed. Sometimes, the term pot is clean is used to refer to being fully subscribed.
Fully Subscribed: Example
Let us take a logical but imaginary example at being fully subscribed. Imagine that a firm CX is in the process of an initial public offering, and it has 1000 units of shares it wishes to give out to public investors. After a series of debates and research by different underwriters, the price of the share was tagged at $20 per unit. During the IPO process, Firm CX decided to offer their 1000 units of shares at $20, and this got investors interested. At the end of the day, Firm CX realized that all their shares have been sold, and there is no more incessant demand for more units.
A situation like this means that the stock or bond offerings of CX has been fully subscribed, as there is no more units of shares remaining, and there is no additional demand. Also, if an underwriter has tagged the price of the share at $12 for fear of not selling enough, then the investors that were willing to purchase them at $20 per share would rush in and this would lead to over demand. In this case, the shares would be exhausted and there would be incessant demands. Also, Firm CX would have lost $8000 in the process. In this case, the stock offerings of firm CX was oversubscribed. Lastly, if the underwriters are looking to make a higher profit than they would've if they set the price at $20, then there is every possible that they'll tag the price at $28 per share to each investor.
If a large part of the investors present are not willing to spend more than $23 per share in this case, then the stock offering wont be fully bought. Now assume that out of the 1000 units, only 700 units were bought, thus leaving CX with additional 300 units of shares which it'd have to lower their prices. To sell off the remaining 300 units, Firm CX might choose to reduce the price per share to $14 per unit, and this would lead to a loss of $1800 on the remaining units. In this case, the stock or bond offering would be said to be undersubscribed.
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