Overallotment: Definition, Purpose, and Example

Overallotment is the situation in which an underwriter sells more shares of a security than are available. This can happen when the demand for a security is higher than expected, or when the underwriter underestimates the number of shares that will be sold.

Definition

Overallotment is a situation in which an underwriter sells more shares of a security than are available. This can happen when the demand for a security is higher than expected, or when the underwriter underestimates the number of shares that will be sold.

Purpose

The purpose of an oversubscription is to ensure that all investors who want to buy shares in an IPO are able to do so. When there is a lot of demand for a security, the underwriter may sell more shares than are available in order to prevent some investors from being disappointed.

Example

Let's say that a company is issuing 1 million shares in an IPO. The underwriter estimates that there will be demand for 1.5 million shares, so they sell 1.5 million shares. However, the actual demand for the shares is 2 million shares. This means that there is an oversubscription of 500,000 shares.

What happens in the case of an oversubscription?

In the case of an oversubscription, the underwriter will allocate the available shares to the investors who submitted the highest bids. The investors who submitted the lowest bids will not receive any shares.

The impact of an oversubscription on the price of a security

An oversubscription can have a positive or negative impact on the price of a security. If the demand for a security is high, the oversubscription may lead to a higher price for the security. However, if the demand for a security is low, the oversubscription may lead to a lower price for the security.

**Overall, an oversubscription is a situation in which an underwriter sells more shares of a security than are available. This can happen when the demand for a security is higher than expected, or when the underwriter underestimates the number of shares that will be sold. The purpose of an oversubscription is to ensure that all investors who want to buy shares in an IPO are able to do so. The impact of an oversubscription on the price of a security can be positive or negative, depending on the demand for the security.