What is 'Oversubscribed'

Oversubscribed is a term used for situations in which a new security issue, such as a stock or bond, is underpriced or in great demand by investors. When a new security issue is oversubscribed, underwriters or others offering the security can adjust the price or offer more securities to reflect the higher-than-anticipated demand.

BREAKING DOWN 'Oversubscribed'

An oversubscribed security offering often occurs when the demand for an initial public offering (IPO) of securities exceeds the total number of shares issued by the underlying company. The degree to which a security is oversubscribed is generally expressed in terms of a multiple, such as "ABC IPO oversubscribed two times," meaning there is a demand for two times the number of shares that will be issued. Ideally, the security's price is set at the exact price at which all the issued shares can be sold to investors, so there is neither a shortage nor a surplus of securities. In the event that there is more demand for an initial public offering than there is supply (creating a shortage), a higher price can be charged for the securities and the issuer can raise more capital.

Example of Oversubscribed Securities

In early 2012, analysts indicated that the long-awaited Facebook IPO, seeking to raise about $10.6 billion by selling more than 337 million shares at $28 to $35 per share, could generate such significant interest from investors that it might lead to an oversubscribed IPO. As predicted, investor interest leading up to the May 18, 2012, IPO showed that there was more demand for Facebook shares than the company was offering. In order to take advantage of the oversubscribed IPO and fulfill investor demand, Facebook offered not only more shares (421 million versus 337 million) to investors but also raised the price range for its shares to $34 to $38 per share. In effect, Facebook and its underwriters raised both the supply of shares and the price of them to meet demand and diminish the securities being oversubscribed; in turn, Facebook raised more capital and carried a higher valuation.

Benefits and Costs of Oversubscribed Securities

When securities are oversubscribed, companies can offer more of the securities, raise the price of the securities, or partake in some combination of the two in order to meet demand and raise more capital in the process. For investors, however, they have to pay higher prices and may even get priced out of the issue if the price is raised above their willingness to pay.

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