A technique used to place securities on the market. It is the process that involves collection of information about investors’ intentions as to the volumes they are willing to have and the prices they are willing to offer for a security. Book building is typically customized to an issuer’s needs, and constitutes one of the most common methods used for public offerings. It is designed to provide both the company (issuer) and the investment bank a solid ground for a successful offering.
The bank marketing an offering gathers this information about investors’ intentions as to required quantities and corresponding offer prices. Book building is a method of pre-market price discovery for initial public offerings (IPOs) and secondary offerings.
This price discovery process is used by investment bankers (as lead underwriters) to capture and establish demand for an issuer’s initial or secondary offering of common stock or other securities. One of the main disadvantage of book building to the issuer may be embodied in a potential underpricing situation, if demand fails to determine a fair price.
An IPO is one common form of book building. It involves an investment bank committing to buying all the shares from the issuer at a set price. The investment bank, as a lead underwriter, assumes the risk of carrying the issued shares, before reselling these shares to the public investors in the market.
Book building takes many forms (see forms of book building): IPOs, accelerated book building, and reverse book building.
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