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| Opening Premium |
The opening premium is the difference at the initiation of trading between the opening price and the valuation of an initial public offering by analysts and the listing investment bank. An initial public offering may have no record of earnings or little or no fixed asset value.
As a consequence, the initial valuation of such a public offering must capture the value of goodwill inherent in the enterprise. The resulting initial valuation is used to develop an expectation of the trading range of the newly issued security once trading commences.
If the initial public offering initiates trade beyond the range specified, it is trading at a positive opening premium. This premium could also be negative if the market does not accept the analyst’s valuation.
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Certain initial public offerings can attract significant attention, especially if they are listed in a seller’s market for IPOs. Hence, the opening premium can be affected by the overall market mood, the level of interest and competition in other new issues, and the market confidence in the analyst’s projections.
In addition, some investors may be able to secure the new issue at a fixed price, determined in advance of the listing. The opening premium can create for these investors an instant profit per share, equal to the opening premium once the security is issued.
