What is book building?

Book building describes the process whereby an institution underwriting a share offer assesses what price would be acceptable to potential buyers, usually fund managers. It is, in essence, a market-testing exercise ahead of the share issue in which large potential buyers are canvassed for their views of the right price.

Where have you heard about book building?

As an investor, you are likely to have heard of book building in relation to new share offers. Your financial adviser may have referred to the results of a book-building exercise, as may the financial media.

What you need to know about book building.

Share issues of any size will be underwritten by institutions, usually investment banks, that will buy the shares from the issuing company and then sell them on to the market. Before agreeing with the issuing company the price at which they will buy the shares, they undertake book-building exercises to judge what sort of price they are likely to be able to realise in the market when they sell the stock. The information gathered during book building ought to help them and the issuing company set the price at a level that will appeal to the market, but there are no guarantees that the potential buyers who were sounded out during the book-building exercise will ultimately purchase the stock.