Overallotment

What is an 'Overallotment'

An option commonly available to underwriters that allows the sale of additional shares that a company plans to issue in an initial public offering or secondary/follow-on offering. An overallotment option allows underwriters to issue as many as 15% more shares than originally planned. The option can be exercised within 30 days of the offering, and it does not have to be exercised on the same day.


Also called a "greenshoe option".

BREAKING DOWN 'Overallotment'

The underwriters of such an offering may elect to exercise the overallotment option when demand for shares is high and shares are trading above the offering price. This scenario allows the issuing company to raise additional capital.


Other times, the purpose of issuing extra shares is to stabilize the price of the stock and prevent it from going below the offering price. If the stock price drops below the offering price, the underwriters can buy back some of the shares for less than they were sold for, decreasing the supply and hopefully increasing the price. If the stock rises above the offering price, the overallotment agreement allows the underwriters to buy back the excess shares at the offering price, so that they don't lose money.

RELATED TERMS
  1. Investment Bank - IB

    A financial intermediary that performs a variety of services. ...
  2. Laddering

    The promotion of inflated pre-IPO prices for the sake of obtaining ...
  3. Pathfinder Prospectus

    A pre-prospectus statement of financial condition that is sent ...
  4. Shares

    A unit of ownership interest in a corporation or financial asset. ...
  5. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs ...
  6. Underwriting

    1. The process by which investment bankers raise investment capital ...
Related Articles
  1. Investing Basics

    5 Tips For Investing In IPOs

    Thinking of investing in IPOs? Here are five things to remember before jumping into these murky waters.
  2. Retirement

    Pages From The Bad CEO Playbook

    Excess compensation, golden parachutes, tunneling and IPO spinning make these bad executives even worse.
  3. Investing Basics

    IPO Lock-Ups Stop Insider Selling

    Ownership plays a key role when companies go public. Find out how.
  4. Retirement

    IPO Basics Tutorial

    What's an IPO, and how did everybody get so rich off them during the dotcom boom? We give you the scoop.
  5. Investing News

    Philips Q1 Results Make IPO Spinnoff More Likely (PHG)

    The direction PHG stock takes from here will likely depend on any update the management provides about the company's separation.
  6. Term

    Advantages of Public Vs. Private Companies

    A privately held company is owned by its founder, management or a group of private investors.
  7. Investing Basics

    A Breakdown on How the Stock Market Works

    Learn what it means to own stocks and shares, why shares exist, and how you buy and sell them.
  8. Markets

    Comparing Primary And Secondary Capital Markets

    In the primary capital market, investors buy directly from the issuing company. In the secondary market, investors trade securities among themselves.
  9. Investing News

    The 2 Top CFOs to Take Companies Public

    Learn why chief financial officers (CFOs) play a greater role in companies today and discover three of the top CFOs today, along with company IPOs they've led.
  10. Investing Basics

    The Pros And Cons Of A Company Going Public

    Small companies looking for growth often use an initial public offering to raise capital. But going public brings both advantages and disadvantages.
RELATED FAQS
  1. Are IPOs available to short sell immediately upon trading, or is there a time limit ...

    The quick answer to this question is that an IPO can be shorted upon initial trading, but it is not an easy thing to do at ... Read Answer >>
  2. Do underwriters make guarantees to sell an entire IPO issue?

    Underwriters represent the group of representatives from an investment bank whose main responsibility is to complete the ... Read Answer >>
  3. What Does the Political Economy Research Institute Do?

    Learn about the Political Economy Research Institute (PERI) and the studies its conducts. PERI's topics are of great interest ... Read Answer >>
  4. When did Facebook go public? (FB)

    Learn how Facebook's initial public offering (IPO) did not go according to plan but how those who stuck with the company ... Read Answer >>
  5. Can mutual funds invest in IPOs?

    Learn whether mutual funds can invest in IPOs. IPO investing is appealing because there is a big upside, but there is considerable ... Read Answer >>
  6. What kind of assets can be traded on a secondary market?

    Learn about the difference between the primary market and the secondary market, and what types of assets are traded on secondary ... Read Answer >>
Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center