Understanding Allotment
In the business world, an allotment refers to the process of distributing shares of a company to individuals or entities who have applied to receive them.
It is a way for a company to allocate its shares to intended shareholders.
Allotment in an IPO
When a company decides to go public and issue shares to potential investors through an initial public offering (IPO), the allotment process comes into play.
In an IPO, the ownership of the company’s shares transitions from private to public, and the shares held by existing private shareholders become tradable at the public trading price.
During an IPO, the company works with underwriters, typically multiple firms, to estimate the demand for its shares before launching the offering.
While stock markets provide mechanisms for determining prices, it is challenging to predict all market conditions accurately, making the allotment process complex.
If the demand for the company’s stock exceeds the available supply, it results in oversubscription.
In such cases, the allotted shares are lower than the requested amount, leading to a spike in share prices shortly after the IPO begins.
Conversely, if the demand is lower than predicted, it results in undersubscription.
This leads to a fall in share prices once the IPO starts, indicating that investors did not receive their desired allotment, and the shares may be available at a lower price than initially announced.