What Is an Allotment?

The term allotment refers to the systematic distribution or assignment of resources in a business to various entities over time. Allotment generally means the distribution of equity, particularly shares granted to a participating underwriting firm during an 澳洲幸运5官方开奖结果体彩网:initial public offering (IPO).

There are several types of allotment that arise when new shares are issued and allocated to either new or existing shareholders. Companies allot shares and other resources when demand is much stronger than the available supply.

Understanding Allotments

In business, allotment describes the systematic distribution of resources across different entities and over time. In finance, the term typically relates to the allocation of shares during a public share issuance. When a 澳洲幸运5官方开奖结果体彩网:private company wants to raise capital for any reason (to fund operations, make a large purchase, or acquire a rival), it may decide to issue shares by going public. Two or more financial institutions usually underwrite a public offering. Each 澳洲幸运5官方开奖结果体彩网:underwriter receives a specific number of shares to sell.

The allotment process can get somewhat complicated during an IPO, even for individual investors. That's because 澳洲幸运5官方开奖结果体彩网:stock markets are incredibly efficient mechanisms for matching prices and quantities, but the demand must be estimated💮 before an IPO takes plac🔥e. Investors must express interest in how many shares they would like to purchase at a specific price before the IPO.

If demand is too high, the actual allotment of shares received by an investor may be lower than the amount requested. If de൲mand is too low, which means the IPO is undersubscribed, then the investor may be able to get the desired allotment at a lower price.

On the other hand, low demand often leads to the share price falling after the IPO takes place. This means that the allotment is oversubscribed.

Other Forms of Allotment

An IPO is not the only case of share allocation. Allotment can also occur when a company's directors earmark new shares to predetermined shareholders. These are investors who have either applied for new shares or earned them by owning existing shares. For example, the company allocates shares proportionately based on existing ownership in a 澳洲幸运5官方开奖结果体彩网:stock split.

Companies allot shares to their employees through 澳洲幸运5官方开奖结果体彩网:employee stock options (ESOs). This is a form of compensation that companies offer to attract new and keep existing employees in addition to salaries and wages. ESOs incentivize employe🌺es to perform better by increasing the number of shares without diluting ownership.

澳洲幸运5官方开奖结果体彩网:Rights offerings or rights issues allocate shares to investors who wish to purchase more rather than doing so automatically. Thus, it gives investors the right but not the obligation to purchase additional shares in the company. Some companies may elect to do a rights issue to the shareholders of a company they want to acquire. This allows the acquiring company to raise capital by giving investors in the 澳洲幸运5官方开奖结果体彩网:target firm an ownership stake in the newly formed company.

Reasons for Raising Shares

The number one reason a company issues new shares for allotment is to raise money to finance business operations. An IPO is also used to raise capital. In fact, there are very few othe🌼r reasons why a company would issue and allocate new shareꦰs.

New shares can be issued to repay a 澳洲幸运5官方开奖结果体彩网:public company's short- or long-term debt. Paying down debt helps a company with interest payments. It also changes critical financial ratios such as the 澳洲幸运5官方开奖结果体彩网:debt-to-equity ratio and 澳洲幸运5官方开奖结果体彩网:debt-to-asset ratio. There are times when a company may want to issue new shares, even if there is little or no debt. When companies face situations where current growth is outpacing sustainable growth, they may issue new shares to fund the continuation of 澳洲幸运5官方开奖结果体彩网:organic growth.

Company directors may issue new shares to fund the 澳洲幸运5官方开奖结果体彩网:acquisition or takeover of another business. In the case of a takeover, new shares can be allotted to existing shareholders of the acquired company, efficiently exchanging their shꩲares for equity in the acquiring company.

As a form of reward to existing shareholders and 澳洲幸运5官方开奖结果体彩网:stakeholders, companies issue and allot new shares. A scrip dividend, for example, is a dividend that gives equity holders some new shares proportional to the value of what they would have received had the dividend been cash.

Overallotment Options

There are options for underwriters where additional shares can be sold in an IPO or 澳洲幸运5官方开奖结果体彩网:follow-on offering. This is called an overallotment or 澳洲幸运5官方开奖结果体彩网:greenshoe option.

In an overallotment, underwriters have the option to issue more than 15% shares than the company originally intended to do. This option doesn't have to be 澳洲幸运5官方开奖结果体彩网:exercised the day of the overallotment. Instead, companies can take as long as 30 days to do so. Companies do this when shares trade higher tha♓n the offering price and when demand is really high.

Overallotments allow companies to stabilize the price of their shares on the stock market while ensuring it floats below the offering price. If the price increases above this threshold, underwriters can purchase the additional shares at the 澳洲幸运5官方开奖结果体彩网:offering price. Doing so ensures they don't have to deal with losses. But if the price falls below the offering price, underwriters can decrease the supply by purchasing some of𓆏 the shares. This may push the price up.