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 holding period/144a?8 Views
Finance a la Shmoop. What is a holding period or a 144 a filing. Should sound
way less sexy. Well after you will make love, there should be
a holding period. Right? So we're talking about investing here, so it's all
different. All right here's the gist. Back in the day, the dark days, you know before
there was honest regulation of the securities industry, a whole lot of [man in bed with BRK share]
cheatin was going on. Fake schemes would offer shares to an
uneducated, unsophisticated public. With the sellers hoping to get rich
quick. The public would buy shares of a supposedly hot IPO. Only to have the
founders and funders of that fake or crappy company dump their
shares five minutes after the company was public. Leaving the outside investors,
holding the bag in the form of IPO shares that they paid eighteen bucks[people surrounding money chart]
each for. Well which we're now trading under a dollar. So today insiders, like
founders and the early investors, are presumed to have a lot more knowledge of
the company's operations, projections, performance and prospects, than the
general public. So the SEC Institute, of what is called the 144 a rule, which sets
out guidelines under which insiders can sell their shares. Meaning they can't [head banker]
just dump all of them on the same day, you know five minutes after the IPO. Very
roughly, insiders must hold their shares at least six months and change after the
first day of official trading during an IPO. And they must limit the volume that,
well they're dumping. That is if insiders, own say, seventy percent of the
shares of a newly, publicly traded company. Well they can't just dump 80% of [garbage truck dumping garbage]
that seventy percent, you know that first week after the six months is over. Got it?
Well in most cases insiders seeking to get liquid, ie turn their shares into
cash, so they can buy that home they've been longing for.
Well they hire an investment bank to gather together all the insider selling
group of shares. The bank then quietly markets them to investors
who had shown interest during the company Roadshow. You know during the
IPO and then in an orderly fashion, the bank sells those shares, to you know,[conference money meeting]
interested parties. The goal here is to, not crash the stock price in the process.
You can imagine what would happen if a stock averaging 300,000 shares a day of
trading, suddenly had a supply of 50 million shares come for sale. Yeah way
more supply, modest demand not a good situation. But you know holding periods,
got to hold them six months. Fortunately there's always cuddling, we[man in bed with DPRP share]
like the cuddling.
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 a greenshoe option? When Morgan Stanley launched Facebook’s IPO, they had humongous demand. The demand was so great that Morgan Stanley t...
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...