What is Price Band?
A price band is a price floor and a cap between which a seller will let buyers place bids on a security, usually during an initial public offering (IPO)
How Does Price Band Work?
For example, let's say Company XYZ is going to go public. As part of the IPO process, Bank ABC (Company XYZ's investment bank) sets a price band on its shares of $45 to $50 per share. This means that buyers must bid at least $45 a share for the first issue of the shares.
Why Does Price Band Matter?
Some markets also use price bands as "circuit breakers" to prevent extreme fluctuations in market prices. In these situations, if a security's price rises by, say, 10% of its opening price or within a certain time limit, the exchange suspends trading on that security for several minutes in order to calm the markets and allow sellers and buyers to find each other in a more orderly way.
Price bands are used to provide guidance to buyers. They are also frequently used in importing and exporting, whereby countries set top and bottom prices for certain goods sold within its borders. Countries then subject goods whose prices fall below a certain price to taxes or duties to force the price back into the band.
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