Key Points
* An allotment is the systematic distribution or assignment of shares or other resources by a company.
* In finance, allotment most often refers to how shares are allocated during an IPO and other issuances.
* Companies issue new shares to raise capital, pay debt, fund growth or acquisitions, or reward stakeholders.
* Underwriters can use an overallotment (greenshoe) to sell up to ~15% extra shares and help stabilize price.
* Oversubscription (demand > supply) and undersubscription (demand < supply) affect allocations and post-IPO price movement.
What is an allotment?
An allotment is the process of distributing a company’s resources — most commonly shares — among investors or stakeholders. In public offerings, allotment describes how shares are allocated to underwriters and ultimately to the public. Allotments occur whenever a company issues new shares and must decide who receives them and in what amounts.
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Common forms of share allotment
- IPO allotment: Underwriters receive blocks of shares to sell in an initial public offering and allocate those shares to investors based on demand estimates and allocation policies.
- Stock splits: New shares are distributed proportionally to existing shareholders, increasing share count without changing ownership percentages.
- Employee stock options (ESOs): Companies grant employees the right to buy or receive shares as compensation and retention incentives.
- Rights offerings: Existing shareholders get the right (but not the obligation) to buy additional shares, typically at a discount, in proportion to their holdings.
- Acquisition-related allotment: New shares may be issued and allotted to shareholders of a target company as part of a takeover or merger consideration.
Why companies raise shares
The primary reason to issue and allot new shares is to raise capital. Common purposes include:
* Financing business operations and expansion
* Repaying short- or long-term debt to improve leverage ratios
* Funding organic growth initiatives or large capital projects
* Financing acquisitions or mergers, including share-based consideration
* Distributing value to shareholders through scrip dividends or similar programs
Overallotment (Greenshoe) option
An overallotment, often called a greenshoe, lets underwriters sell additional shares beyond the amount originally offered—commonly up to about 15%—for a set period (frequently up to 30 days) after the IPO. Purposes:
* Meet unexpectedly strong demand without having to set a new offering
* Stabilize the post-IPO market price: underwriters can buy or sell extra shares to reduce volatility
Mechanics:
* If price rises above the offering level, underwriters can buy shares at the offering price (or exercise the greenshoe) to cover short positions.
* If price falls, underwriters may buy shares in the open market to support the price.
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Oversubscription vs. undersubscription
- Oversubscription: Demand exceeds available shares. Investors typically receive fewer shares than requested; IPO prices can rise on strong demand.
- Undersubscription: Demand falls short. The company may receive more shares back or reduce allocations; share prices often fall after the IPO.
How allotments are determined in an IPO
Underwriters estimate demand before pricing an IPO by gauging investor interest and indications of interest. Allocation decisions depend on:
* Total demand versus shares available
* Pricing set for the offering
* Strategic allocation across investor types (institutional vs. retail)
When demand is high, underwriters may pro rata allocations, favor long-term institutional investors, or use discretionary methods. When demand is low, underwriters and the issuer may adjust pricing or marketing to improve uptake.
Practical tips for investors
- Expect limited allotments for popular IPOs—receiving the full requested amount is uncommon when demand is strong.
- First-time IPO investors may consider starting small until they understand the allotment and aftermarket behavior.
- Pay attention to whether a greenshoe has been granted; it can affect short-term price stability after the IPO.
Conclusion
Allotment is a core part of issuing new shares, shaping who gets stock and how markets absorb supply. Understanding different allotment mechanisms, why companies raise equity, and tools such as the greenshoe helps investors and company stakeholders anticipate allocation outcomes and post-issuance price behavior.