Investing in an IPO (Initial Public Offering) has become increasingly popular among retail investors who want to grab the opportunity to invest in a company from the very beginning of its stock market journey. But when applying for an IPO, you might have come across the term “cutoff price” – and wondered what exactly it means.
In this blog, we’ll break down the concept of the cutoff price, how it works, and why it’s important for IPO investors.
🔍 What is an IPO?
Before diving into the cutoff price, let’s quickly understand what an IPO is.
An Initial Public Offering (IPO) is when a private company offers its shares to the public for the first time by listing on a stock exchange. Through the IPO, the company raises funds from investors in exchange for equity (ownership).
🎯 What is the Cutoff Price in an IPO?
The cutoff price is the final price at which shares are allotted to investors in a book-built IPO.
When a company launches a book-building IPO, it does not fix a single price. Instead, it provides a price band – for example, ₹100 to ₹110. Investors can place bids within this price band, and based on the demand from investors, the final price is determined. This final price is called the cutoff price.
In simple terms:
The cutoff price is the price decided by the company and the investment bankers at which shares are actually allotted to investors.
🧾 Example of Cutoff Price
Let’s say a company is launching an IPO with a price band of ₹100 to ₹110.
- Retail investors bid at different prices: ₹100, ₹105, ₹107, ₹110.
- The company and underwriters analyze the demand at various prices.
- They decide the final price to be ₹108, based on maximum demand.
👉 So ₹108 becomes the cutoff price.
Those who bid at or above ₹108 get the shares (depending on allotment rules), and those who bid below ₹108 don’t get any shares.
✅ What Does it Mean to Apply at the Cutoff Price?
Retail investors applying through platforms like Zerodha, Groww, or traditional brokers often get the option to apply at the cutoff price.
If you select the “Cutoff” option while applying:
- You are showing your willingness to accept the final price (whatever it may be within the price band).
- This increases your chances of getting shares, since you are not limiting your bid to a specific price.
🟢 Note: Only retail investors and employees are allowed to apply at the cutoff price. Institutional investors must place exact price bids.
🧠 Why is Cutoff Price Important?
- It determines who gets shares and who doesn’t in case of oversubscription.
- It reflects the true demand and valuation of the IPO.
- It helps investors who don’t want to guess the right price and still want a chance at allotment.
🔚 Final Thoughts
The cutoff price is a critical element of the IPO process in book-built issues. If you’re a retail investor looking to invest in IPOs but are unsure of what price to bid, choosing the cutoff option is usually the safest bet. It saves you from the guesswork and gives you a fair shot at allotment.
So next time you’re applying for an IPO, don’t stress too much about the bid price — just tick that cutoff box and let the market decide the rest!
Do you invest in IPOs regularly or plan to start? Share your experiences or questions in the comments below!
