A process used to determine the offer price of securities during an IPO by collecting bids from institutional investors at various price levels. It helps gauge market demand and establish an appropriate pricing range.
'Book' from Old English 'boc' (written document) referring to the record of bids, and 'building' indicating the gradual construction of the order book. This method developed in the 1980s as a more efficient alternative to fixed-price offerings.
Book building is like an auction in reverse - instead of starting low and going up, underwriters start with a price range and see how much demand exists at each level. This process often reveals that institutional investors have very different price expectations than retail investors!
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