We'll get to what the term "allocation notice" means in a minute, but first a brief aside about IPOs. (Hint: allocation notices are related to IPOs.)
Companies begin trading their stocks by conducting something called an initial public offering, or IPO. This means that they set aside some of the company's stock, which is then made available to the public. Before it begins trading, though, some insiders and others with an inside track get offered shares. They can then sell the shares on the public market after the stock begins trading.
If a stock is popular, this can lead to a big payday for people who got this early IPO stock. For that reason, the line for these shares is often pretty long (figuratively, of course; rich people, like those with the inside track for IPO shares, rarely wait in actual lines).
When the IPO process is underway, potential investors put in their request for some of these early shares. Due to the popularity, there might not be enough shares available to fill every order completely.
Now we get to the term "allocation notice." An allocation notice represents how the investor finds out if their order will get filled, and if they will get the full amount they asked for or a partial order. Hence, investors are notified of their allocation (makes sense, right?).
Think about it as the part of a speed dating event where you find out if the people you picked also picked you. Only, in this case, you might find out that you could get 79% of a date.
Related or Semi-related Video
Finance: What is a greenshoe option?15 Views
finance a la shmoop what is a greenshoe option. oh you should be so lucky
green shoes on leprechauns and investment bankers are such a good thing. [leprechaun smiles]
why? well because when there is so much excess money laying all over the floor
your shoes turn green from the bills as you take whatever money you can carry
and run. that's how the name happened anyway a greenshoe option is a deal term
that an investment bank negotiates for in an IPO they run. and that IPO remember
is an initial public offering of stock. this can apply also to secondary
offerings and other kinds of offerings but we're focused on an IPO here as a
green shoe lives. if that IPO is marketed so well and there is so much demand for
shares in the company from the public that the bank believes it can raise the
IPO price and sell more shares to the public then that IPO was a huge winner.
the bank will exercise its greenshoe option and instead of selling 30 million [money falls from the sky]
shares of Chucky LARM calm to the public at 12 bucks a share well it'll bring the
company public at 15 bucks a share and sell 40 million shares. the math? it
raises 600 million bucks in the latter green shoe field option versus 360
million bucks in the former. the green shoe is the extra 10 million shares that
the bank can sell and get commission on while doing so. and if you think about
that world as a 5% kind of Commission world well the banks go from 18 million
in total Commission's to 30 million. yeah nice freakin bump especially when
there's a basic fixed cost of maybe 10 million dollars in either case. so you
make a lot more profit on the 30 million story here yeah? all right and having
more shares out there trading is a good thing for the company because its shares
are then more liquid. it's easier to buy and sell larger blocks of stock and the [stocks being sold in a graphic]
big institutions like that. they tend to then take a lot more
interest in the stock and usually that leads to higher stock prices down the
line. and all that liquidity or movement shares trading back and forth well
that's more Commission dollars in the future for the bank. so check your shoes
if they're green well you're either in the money or you should really get Rover
to the vet. [green poo on a wood floor]
Up Next
What is an IPO? IPO stands for initial public offering. These are used when a company decides to go public; meaning people can buy shares of the co...
What is an Aggressive Growth Fund, A GO GO Fund, A High Octane Fund? An aggressive growth fund (also referred to as GO GO or high octane) is a type...
What is a holding period/144a? The road to becoming a successful public company often entails selling equity or debt in private placements to “ac...