The Guidance Price is the price in an IPO used to calculate capital gains tax when the stock trades on the exchange. It’s also essential when valuing a company because it can affect the potential return.
What Is the Guidance Price?
The Guidance Price isn’t always in Hong Kong dollars, and not in every country does there exist such a thing as a Guidance Price. In fact, in some countries, we use “IPO price”, which means the same thing.
But in some cases, the term “Guidance Price” is used. It’s essential to understand what it is and how it affects your investment return when that happens. A guidance price isn’t like an official IPO price. Instead, it’s similar to a soft launch of an Initial Public Offering (IPO).
Just because the stock trades for this value does not mean there are no problems with the company or its business model. It simply means that it will be used when people exchange their shares at market value.
That means you’ll have to work out the estimated share price beforehand rather than just valuing public companies on an open market after they’ve gone through the registration process.
How Is the Guidance Price Set?
There are several ways the Guidance Price can be calculated, depending on how it’s used. It could be set by an independent party or by the company putting itself up for IPO.
When Does the Company Set The Guidance Price?
If you’re looking at privately owned businesses but want to go public, then the Guidance Price will likely be established using some formula based on what kinds of businesses they do and other metrics.
If there aren’t many people looking to buy, then even if you have a great business. That means the Guidance Price often leads with price because it encourages people to buy your stock upfront.
When Do an Independent Party Set The Guidance Price?
If there is no preference for setting the price at a certain level — for example, in IPOs where the company isn’t particularly closely tied to other businesses or has negligible market share — then an independent party may take that role.
The Role of The Stock Exchange
Many different factors influence whether an IPO uses their internal formula or uses one from an independent party.
In the case of Hong Kong, it’s not unusual for a third party to establish the Guidance Price. Susquehanna has been frequently selected for this role because of its worldwide coverage and its high level of expertise in determining what investors in different regions want.
When Do the Stock Exchange Set The Guidance Price?
The stock exchange itself can take on the responsibility of calculating the Guidance Price for you. It doesn’t mean that everybody loves or even likes what they come up with, though. You’ll still see people complain about this price when there are significant spikes in trading volume after going public.
Sometimes people will make cases suggesting it’s wrong, but they don’t have much evidence backing them up other than “it’s too low” or “it’s too high.”
Is It Acceptable to Ask About The Guidance Price?
Let’s say you’re thinking about investing in a company, and they mention the Guidance Price. So you ask, what exactly is this price? They tell you it isn’t official, and there aren’t any rules governing them setting this value.
That means it does not affect whether your shares will go up or down after trading begins. If that’s all that happens, there usually isn’t a problem because it doesn’t affect you as an investor. However, if the company says something like: “Do not pay attention. The price is meaningless at this stage.”
You want to know whether or not the company believes this price will be lower than what they end up getting once trading starts (and if that’s why it isn’t official, then it probably won’t be).
If they’re saying the Guidance Price doesn’t matter because no rules govern them, then take them at their word until you can prove otherwise with facts and evidence.
Do not listen to rumours about the stock, so you don’t get stuck paying more than somebody else for something that’s essentially worthless in your hands.
If you do pay attention, start making plans to sell immediately — even when there are significant changes in public perception about companies like Facebook or Twitter. That’s because the Guidance Price doesn’t come from an independent party – it comes from the company itself.
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