What is Cutoff Price in IPO and Why Bid at Cutoff Price ?
Many times investing in the primary stock market gives lucrative returns in a short period of time compared to the secondary market. Yes, bidding at the initial public offer (IPO) can you give multiple times returns but bidding at the right price is important to get the allotments.
Let me tell you one thing, IPO the shares are offered within the price range and investors are required to bid within that range. Do you know at which price you should bid to become eligible for the allotment of shares so that you can enjoy listing gains, especially when the IPO is oversubscribed and you go the allotments?
While applying to IPO through your broker, you will get options to bid between the floor prices to the upper price range or at cut-off price. In this article we have discussed the cut-off price and why you should bud at the cut-off-price.
What is Cut-Off Price in IPO ?
Used in the initial public offer (IPO) Cut-off price is the offer price decided by the share issuing company with the help of book running lead managers and IPO consultation. Compare to the price band, the Cut-off price could be any price within the price band.
Actually, in an IPO launched through the book-building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The issue price that is actually discovered can be any price within the price band, or any price above the floor price. While on the other hand the Cut-off price is different from a floor price, which is the minimum price at which inventors can bid.
Why You Should Bid on Cut-off price ?
As I've already told you cut-off price is decided by the issuer and lead managers after considering the book and investors' appetite for the stock.
If you bid at the cut-off-price it indicates that you are willing to apply for the IPO or subscribe to the shares issued at any price decided by the Merchant bankers within the price band through the book-building process.
In an IPO all the eligible employees bid in the employee reservation portion and retail individual Investors are entitled to bid at the cut-off price. While on the other hand, all the other types of investors like QIBs (including anchor investors) and non-institutional investors are not entitled to bid at the cut-off price.
The best advantage of bidding at cut-of-price is that unlike price bids, where a specific price can be invalid if the price indicated by the applicant is lower than the price discovered, the cut-off bids always remain valid for allotment.
IPO Example to Bid at Cut-off-price
IPO Price Range: Rs. 250-260
You Applied 10 Shares at Rs 255
If Shares are Issued at Rs. 253 (you will receive allotment at Rs. 253)
If Shares Issues at Rs. 257 (you will not receive allotment)
If applied at Cut-off-price (you are eligible for allotment at any determined issue price).
Bidding in the IPO at cut-off price not only increases your chances of getting the allotment but also prevents you from rejection due to an invalid IPO application. However, bidding at a cut-off price not guarantees you get the allotment as if an IPO is oversubscribed many times it becomes difficult for the retail investors to get the shares into their demat accounts.
But you need to keep trying if the IPO is fairly valued and there is potential in the stock to give you returns on the listing day or in the near term. But always make sure to follow all the rules and regulations while applying for the IPO to avoid any chances of rejection. And if you are looking to apply for IPO through the moneysukh platform, browse at trade.moneysukh.com and log in through your Moneysukh User ID & password Navigate to the IPO area and select the IPO.