Issue Price

The issue price refers to the price at which a financial security, such as a stock or bond, is offered to investors during an initial public offering (IPO) or a new issuance. It is the price at which the company or the underwriters set the security's value when it is first made available to the public.

Market Price

The market price, on the other hand, is the current price at which a security is trading in the market. It is determined by the forces of supply and demand, and it fluctuates throughout the trading day based on various factors such as investor sentiment, economic conditions, and company performance.

Comparison

In this context, the term "issue price" is being compared to the "market price" to determine their relationship. The correct answer to the question is option 'B' - lower than the market price.

When a company decides to issue new securities, it typically aims to generate capital by selling them to interested investors. The issue price is usually set at a discount to the market price to entice buyers. This is because investors generally expect to receive a discount or some form of incentive when purchasing newly issued securities.

The discounted issue price is considered advantageous for investors because they can purchase the securities at a lower cost compared to the prevailing market price. It allows them to potentially profit from any price appreciation when the securities begin trading in the secondary market.

Example

For example, let's say a company is planning to go public and issue shares through an IPO. The market price of the shares in the secondary market is $10. However, the company decides to offer the shares to the public at an issue price of $8. This means that investors who participate in the IPO can purchase the shares at a $2 discount to the market price.

This lower issue price makes the IPO more attractive to investors as they can immediately gain a profit if the market price of the shares rises above the issue price. Therefore, the issue price is set lower than the market price to incentivize investors to participate in the offering.

Conclusion

In summary, the issue price is typically lower than the market price when new securities are offered to investors. This discount encourages investors to participate in the offering, as they can potentially profit from any price appreciation in the secondary market.