In the context of an IPO, underpricing involves setting the initial stock price below its market value. This often results in a substantial first-day price increase. The effects of IPO underpricing include:
1. Investor Attraction: A lower initial price can attract more investors, ensuring that the IPO is fully subscribed. 2. Market Buzz: A significant first-day price jump can generate positive media coverage and investor interest. 3. Liquidity: Underpricing can enhance liquidity in the initial trading days, making it easier for shares to trade.