What is a book-building process in IPOs?

If you’ve ever looked closely at how companies decide the final share price during an IPO, you’ve likely come across the term "book building." The phrase sounds technical, but the book building process in IPO explained simply means this: the company lets the market tell it what the share price should be. Rather than fixing a price upfront, the company invites investors to bid within a specified range, and the final price emerges from those bids.

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So how does it actually work in practice? When an IPO is launched, the issuing company sets a price band, a lower and upper limit. Investors then place their bids anywhere within that range. Some may bid at the lower end, while others may choose a higher figure if they believe demand will be strong. This is where how price discovery happens in book built issues becomes interesting. Merchant bankers collect all these bids, study the demand at each price point, and then work out the level at which the maximum number of shares can be allotted fairly.

This is known as the “cut-off price,” and it becomes the final issue price for all successful bidders. Instead of random guessing or arbitrary pricing, the book-building mechanism allows the market to shape the final value based on genuine demand. When interest is high at the upper band, the final price usually settles there. If demand is more balanced or moderate, the final price might land somewhere in the middle.

For new investors, understanding book building mechanisms for investors makes the entire IPO process feel far less mysterious. It creates transparency by showing where demand is gathering and ensures the price is rooted in real investor appetite rather than arbitrary valuation. Retail investors, in particular, often choose the “cut-off” option to avoid missing out if the final price is higher than what they would have manually entered.

What makes book building so effective is that it aligns the interests of the company and investors. The company raises funds at a fair market driven price, while investors benefit from a more accurate valuation based on broad participation. It avoids the extremes of underpricing or overpricing that used to be common in fixed-price issues.
In simple terms, book building transforms an IPO from a guesswork exercise into a structured, demand-driven pricing process, one that keeps everyone better informed and ensures greater confidence in the final outcome.