Issue price: Overview, definition, and example
What is the issue price?
The issue price refers to the price at which a company offers its securities—such as stocks, bonds, or other financial instruments—during an initial offering or new issuance. The issue price is typically set by the company, in consultation with underwriters or financial advisors, based on various factors, such as market conditions, demand for the securities, and the company’s financial performance. For stocks, the issue price is the price at which shares are sold to investors in an initial public offering (IPO) or secondary offering. For bonds, it is the price at which the bonds are sold to investors when they are issued.
Why is the issue price important?
The issue price is important because it determines how much capital the company will raise through the offering. Setting the right issue price helps balance the need to raise sufficient funds while ensuring that the securities are attractive to potential investors. For investors, the issue price affects the potential for future returns. If the issue price is set too high, it might discourage buyers, resulting in a lower demand for the securities. Conversely, setting it too low could result in the company raising less capital than needed. The issue price also influences the market performance of the securities once they are publicly traded.
Understanding the issue price through an example
Let’s say a company is going public and conducting an initial public offering (IPO). The company decides to issue 1 million shares of stock at an issue price of $20 per share. If the offering is successful, the company will raise $20 million (1 million shares × $20 per share) from the sale of these shares. The company will use this capital for business expansion, paying off debt, or other corporate purposes.
In another example, a company issues bonds to raise capital. The bonds have a face value of $1,000 each and an issue price of $950. This means that the company sells each bond at a slight discount to its face value. While the investor pays $950 to purchase the bond, the company will pay the bondholder the full $1,000 at maturity. The difference between the issue price and the face value represents the yield the investor will receive.
An example of an issue price clause
Here’s how a clause related to the issue price might appear in a contract:
“The Company agrees to issue [number] shares of common stock at an issue price of [$X] per share in the public offering, subject to adjustment based on market conditions and underwriter recommendations. The total capital raised from the offering shall be used for [insert purpose].”
Conclusion
The issue price is a critical component in determining how much capital a company can raise through the issuance of securities and how attractive those securities will be to investors. Setting the right issue price is crucial for the success of an IPO or bond offering, as it directly influences investor demand and the company’s ability to meet its funding needs. Understanding the issue price helps both companies and investors make informed decisions regarding the offering and its potential impact on the financial market.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.