Book building

Book building is the process underwriters use ahead of an IPO to gauge investor demand and arrive at a final offering price. During the roadshow, underwriters meet with institutional investors and collect non-binding indications of interest, how many shares each investor would want and at what price, across a range of proposed prices.

As these indications come in, underwriters compile them into an order book, which shows how demand for the deal builds up at each price level. If the book fills quickly and is oversubscribed even at the higher end of the proposed range, the underwriters and company will often raise the final price or increase the deal size. If demand is weak, they may price toward the bottom of the range or shrink the offering.

The goal is to set a price that clears the market, selling all the shares while leaving enough demand unmet that the stock trades well once it starts trading publicly, rather than immediately falling below the offering price. Book building also determines allocation, since underwriters use it to decide which investors get shares and how many, generally favoring larger institutional holders that are seen as more likely to hold the stock for years rather than flip it for a quick profit.