Overallotment and Greenshoe options
It would help alot for me to understand if the two mentioned topics were explained in a bit more simplified manner.
It would be even better if a numnerical example was undertaken.
Hi,
Good to hear from you.
The greenshoe option allows underwriters to issue 15% more shares than initially offered during an IPO to stabilize the stock price. If the price rises, underwriters buy back these extra shares at the IPO price, preventing excess supply. It's a tool to manage volatility, not to over-allot shares unintentionally.
In the context of a greenshoe option, over-allotment does happen intentionally. Here’s how it unfolds in brief steps:
1. Initial Offering: During an IPO, the underwriters sell more shares than initially available, creating an over-allotment situation.
2. Market Stabilization: If the stock price falls, underwriters buy back the over-allotted shares at market price, supporting the stock price.
3. Exercising the Greenshoe Option: If the stock price increases, underwriters can buy up to 15% more shares at the original IPO price from the issuer, covering their over-allotment without flooding the market.
Hope this helps!
Best,
Ned