Greenshoe Option

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Definition of 'Greenshoe Option'

A greenshoe option is a type of over-allotment option that allows the underwriter of a new stock offering to sell additional shares of the company's stock at the initial public offering (IPO) price. The greenshoe option is designed to help the underwriter ensure that the IPO is successful by providing them with a way to sell more shares if there is high demand for the stock.

The greenshoe option is named after the investment bank Goldman Sachs, which is said to have invented the practice in the 1950s. The term "greenshoe" is derived from the color of the shoes that Goldman Sachs employees wore at the time.

The greenshoe option is typically exercised if the stock price rises significantly on the first day of trading. In this case, the underwriter will sell the additional shares at the IPO price, which will help to prevent the stock from becoming too expensive.

The greenshoe option is controversial because it can give the underwriter an unfair advantage over other investors. Critics argue that the greenshoe option allows the underwriter to sell more shares at the IPO price, which can artificially inflate the stock price.

However, supporters of the greenshoe option argue that it is a necessary tool for ensuring the success of IPOs. They argue that the greenshoe option helps to create a more orderly market for IPOs and that it prevents the stock price from becoming too volatile.

Ultimately, the decision of whether or not to use a greenshoe option is up to the company that is going public. However, it is important to be aware of the potential risks and benefits of using a greenshoe option before making a decision.

Here are some additional details about greenshoe options:

* The greenshoe option is typically exercised within 30 days of the IPO.
* The underwriter typically pays a fee to the company for the greenshoe option.
* The greenshoe option is only used for IPOs that are priced above $100 per share.
* The greenshoe option is not used for all IPOs.

If you are considering investing in an IPO, it is important to be aware of the potential risks and benefits of the greenshoe option. You should also consult with a financial advisor before making any investment decisions.

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