IPO University

In a perfect world, IPOs are designed to be priced at a discount to existing publicly traded companies. In theory, this is meant to reward early investors for buying an unseasoned company with no public track record. In reality, it is the lead manager's educated estimate on the highest price at which there will be solid demand for the IPO, both on the offering and in the aftermarket. The difference between the IPO price and its opening price is called the premium. Some investors think the difference between the IPO price and the price at the first day's close is a better measurement of the IPO premium due to the confusion that normally surrounds balancing buy and sell orders at the opening.