Definition
Allotment in finance refers to the assignment of shares to investors in proportion to their subscription in an IPO (Initial Public Offering) or similar issuance of stock. The primary reason for raising shares through allotment allows the company to generate capital for growth and operation expansion. An IPO is the first sale of a company’s shares to the public, representing a widely-used strategy for companies seeking to transition from private to public status.
Phonetic
Pronunciation of the keywords in International Phonetic Alphabet (IPA):- Allotment: /əˈlɒtmənt/- Definition: /ˌdɛfɪˈnɪʃ(ə)n/- Reasons: /ˈriːzənz/- For: /fɔːr/ or /fər/- Raising: /ˈreɪzɪŋ/- Shares: /ʃɛərz/- IPOs: /ˈaɪpiːˈoʊz/
Key Takeaways
<ol> <li><strong>Allotment Definition:</strong> Allotment refers to the process where a company allocates its securities to investors. This is usually done when a company issues new shares to raise capital. When a company receives more applications than there are shares available, it needs to decide how many shares to allocate to each investor – this is known as allotment.</li> <li><strong>Reasons for Raising Shares:</strong> Companies may decide to raise more shares for various reasons, typically revolving around the need to generate more capital. This fund can be used to expand the business, pay off debts, invest in new projects, or maintain cash flow. Additionally, selling more shares can also help to dilute the ownership, prevent hostile takeovers, and distribute risk more evenly.</li> <li><strong>Initial Public Offerings (IPOs):</strong> An IPO is the process by which a private company becomes publicly traded on a stock exchange. This is another method used to raise a significant amount of capital, allowing the company to grow and expand. It offers the company’s shares to the public for the first time. IPOs can also provide an exit strategy for early investors to realize their investment returns.</li></ol>
Importance
Allotment is a critical business/finance term as it refers to the allocation of shares to investors, showing how ownership of a company is distributed. It’s notably significant during Initial Public Offerings (IPOs), where companies raise capital by selling shares to the public for the first time. The number of shares that each investor receives is determined through an allotment process. This term and concept are vital as they highlight a company’s reason for raising shares, which is typically to raise funds for expansion, payoff debts, or finance other business activities. Hence, understanding allotment offers insights into a company’s financing strategy and capital structure, making this concept important for investors in their decision-making process.
Explanation
Allotment is a significant concept in the financial and business world. Essentially, it refers to the allocation or distribution of shares among interested investors, either in the primary or secondary markets. In an initial public offering (IPO), for example, when a company decides to go public in an attempt to raise capital, it allocates a certain number of shares for sale to prospective investors. This process is officially known as an allotment. The purpose of this process is to raise capital for either expansion, acquisition, debt repayment, or for various other reasons that can enhance the company’s profitability and growth in the future.The reasons for raising shares using an allotment process can vary, but one of the most common is to increase the company’s capital base. Companies often require money for several reasons such as funding research and development, business expansions, or acquisitions. Allotment is one of the most viable techniques to fulfill these financial needs. IPOs, on the other hand, are part of the allotment process and refer to the first-ever sale of a company’s stock to the public. IPOs can be a lucrative way for companies to raise substantial funds, and also provide an opportunity for the public to participate in the company’s growth. Ultimately, the overall purpose of allotment and IPOs is to facilitate financial mobilization and resource allocation in the most efficient manner within an economy.
Examples
1. Allotment Definition: Real World Example: Alphabet Inc., the parent company of Google, may decide to issue additional shares to its existing shareholders. These shares are known as an allotment. For example, Alphabet Inc. might issue one additional share for every ten shares that an existing shareholder owns. This is known as a 1:10 allotment.2. Reasons for Raising Shares: Real World Example: In 2015, Netflix Inc. decided to raise shares by executing a seven-for-one stock split. This increased the total number of shares and made them more affordable for average investors. They did this to increase liquidity and to attract more investments.3. Initial Public Offerings (IPOs): Real World Example: In December 2020, DoorDash, a food delivery service, launched its IPO. They raised approximately $3.37 billion, issuing shares at $102 each. DoorDash conducted its IPO to raise capital to expand its business operations, take on new investments, and increase its market share.
Frequently Asked Questions(FAQ)
What is the definition of Allotment in finance?
Allotment in finance refers to the allocation of shares to interested investors during an Initial Public Offering (IPO) or a Secondary Market Offering. It is the process by which company shares are divided and distributed amongst investors who have shown interest in purchasing.
What are the reasons for a company to raise shares?
Companies raise shares to increase capital for various reasons such as: funding business expansion, reducing debt, financing new projects, improving liquidity, or even as a part of an exit strategy for early investors.
What is an Initial Public Offering (IPO)?
An IPO is the process by which a private company can go public by selling its stocks to the general public for the first time. It’s a way for the company to raise capital from public investors.
How does the allotment process work during an IPO?
When a company announces its IPO, interested investors apply for shares. After the application process ends, the allotment process begins. The company, along with underwriters, decides how to distribute shares among applicants based on certain rules and regulations. Usually, not all applicants get the number of shares they applied for, which may depend on the level of oversubscription.
Can all investors get shares during an IPO?
No, not all investors can get shares during an IPO. There’s usually high demand for shares at this stage, and shares are allotted based on certain criteria and rules. In cases of over-subscription, shares may be distributed proportionally amongst investors.
How does allotment impact the stock market?
Allotment can impact stock prices in the market. If shares are undersubscribed, it may lead to a lower stock price when the company gets listed. Conversely, oversubscription may lead to a rise in stock price post listing.
What role do underwriters play in share allotment?
Underwriters are typically investment banks that work with the company going public. They play a crucial role in evaluating market conditions, setting the IPO price, and overseeing the share allotment to ensure it is carried out fairly.
Related Finance Terms
- Allotment: The process of distribution of securities to investors or the allocation of shares in a company to shareholders who have applied for them during the issuing process.
- Equity Financing: The process of raising capital through the sale of shares in a company. This is one of the reasons a company might decide to allot shares.
- Initial Public Offering (IPO): The process where a privately held company becomes a publicly-traded company by offering its shares to the public for the first time.
- Secondary Market: The place where investors buy and sell previously issued securities, like stocks that have been allotted through an IPO.
- Dilution: A reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur when holders of stock options, such as company employees, or securities convertible into shares exercise their options.
