How is a stock's IPO price decided?

[Ariyahn2011]

I have always wondered how it is decided what the stock will list as. For example, some stocks are 0.10 cents and have market caps of 50MIL and meanwhile some stocks are listed at $12 and have a market cap of 50mil.
When I was a complete noob, I always thought the $12 stock was the blue chip stock lol.
But anyway, why is it that stocks are given different price tags? It looks a bit more appealing when stocks are trading at higher values. I realise the price is irrelevant, but rather, the market cap is what is important.
Can anybody help me out with this question?
Cheers

 

[Triathlete]

I have always wondered how it is decided what the stock will list as. For example, some stocks are 0.10 cents and have market caps of 50MIL and meanwhile some stocks are listed at $12 and have a market cap of 50mil.
When I was a complete noob, I always thought the $12 stock was the blue chip stock lol.
But anyway, why is it that stocks are given different price tags? It looks a bit more appealing when stocks are trading at higher values. I realise the price is irrelevant, but rather, the market cap is what is important.
Can anybody help me out with this question?
Cheers

Does it have something to do with minimum parcel size to investors?
so that would allow a greater number of investors access to the stock in regards to the cost.

 

[Craton]

Does it have something to do with minimum parcel size to investors?
so that would allow a greater number of investors access to the stock in regards to the cost.

I wouldn't have thought so. Most IPO's I've noted or participated in have a min buy in of $2,000 ~ $2,500. After the float the min on market buy is $500.

Taking the OP's $50mill:

At IPO and say min $2,000 parcel
$50mill divided by min of $2,000 equals 25,000 parcels

At market and min $500 parcel
$50mill divided by $500 equals 100,000 parcels

Seems to me it doesn't matter whether its 10c shares or $12 shares the parcel amounts are still the same but perception is in the eye of the beholder.

Apart from the book build, pricing may be affected by the percentage amount of the 100% of company shares being floated/offered, say 20% compared to 80% but that's just a guess on my part.

 

[skyQuake]

imo its entirely perception.

Junior miner/explorer = 20c.

Reasoning: 20c makes the stock look "cheap", everyone has seen a 20c miner go to $2
10c a possibility too but it may also make the stock look like a dog

Respectable industrial already earning money = $2 plus

Reasoning: $2 range still makes it look cheap, but respectable. Not a crappy junior miner but an actual business thats 'lower priced' vs peers. Anchoring effect plays a huge role.
eg. If i wanted to list a bank today would I list it at 20c or $2 or $20
20c I'll get laughed out of the IPO, $2 people will think there's something wrong with the bal sheet. $20 sounds cheap for a bank! After all the big 4 are 'priced' much higher

Of course, all these things ignore shares on issue.

 

[Wysiwyg]

imo its entirely perception.

Junior miner/explorer = 20c.

Reasoning: 20c makes the stock look "cheap",

The South 32 ipo is a good example of preferring billions of shares on issue. Maybe this induces high turnover of shares and plays with a thought that investors can get in at a low price. The larger American companies go for few shares on issue with 10's to 100's of dollars per share.

 

[Triathlete]

Does this explain it ? tried to google it. This is what came up.

How many shares should be authorized in the certificate of incorporation?

I usually advise companies to authorize around 10 to 15 million shares of common stock. Around 8 or 9 million shares are issued to founders with a 1 million to 2 million share option pool, for a fully-diluted base of around 10 million shares. The remaining authorized but unissued shares are a reserve in the event more shares need to be issued.
From a purely mathematical perspective, it doesn’t matter whether there are 1 million or 10 million fully-diluted shares. However, when companies are granting options to new employees, even the smartest engineers feel better receiving options to purchase 100,000 shares as opposed to 10,000 shares, even if it represents the same percentage ownership of the company.
Assuming a $15/share IPO price and dilution due to financings, 20 million shares outstanding will result in a $300M market cap, which is about the minimum size necessary to complete a successful IPO. This avoids having to do a reverse or forward stock split at the time of an IPO.

www.startupcompanylawyer.com

 

[skyQuake]

Does this explain it ? tried to google it. This is what came up.

How many shares should be authorized in the certificate of incorporation?

I usually advise companies to authorize around 10 to 15 million shares of common stock. Around 8 or 9 million shares are issued to founders with a 1 million to 2 million share option pool, for a fully-diluted base of around 10 million shares. The remaining authorized but unissued shares are a reserve in the event more shares need to be issued.
From a purely mathematical perspective, it doesn’t matter whether there are 1 million or 10 million fully-diluted shares. However, when companies are granting options to new employees, even the smartest engineers feel better receiving options to purchase 100,000 shares as opposed to 10,000 shares, even if it represents the same percentage ownership of the company.
Assuming a $15/share IPO price and dilution due to financings, 20 million shares outstanding will result in a $300M market cap, which is about the minimum size necessary to complete a successful IPO. This avoids having to do a reverse or forward stock split at the time of an IPO.

www.startupcompanylawyer.com

US tech startups are very diff from Aus explorer hopefuls. Nasdaq and AMEX have min market caps, and Nasdaq has a min share price ($1), stocks under that will be given warnings then delisted.

 

[Ariyahn2011]

Thanks for the responses..