What is an allotment?
Allotment pertains to the methodical allocation or assignment of resources within a business to different entities across a period. In the context of equity, it signifies the apportionment of shares to a participating underwriting firm during an initial public offering (IPO). The act of allotment involves the issuance and distribution of new shares to either fresh or existing shareholders, a practice commonly implemented when the demand for shares surpasses the existing supply.
Allotment in Business Explained
In business, allotment means the systematic dispersion of resources among various entities, spanning a designated period. In the realm of finance, this term primarily pertains to the distribution of shares during a public issuance of stock. When a private company seeks to gather capital, be it for operational funding, significant acquisitions, or competitive takeovers, it may opt to generate funds through the public issuance of shares. Generally, multiple financial institutions collaborate to underwrite such public offerings, each receiving a predetermined quantity of shares for sale.
The process of allotment can grow complex during an Initial Public Offering (IPO), even for individual investors. This complexity stems from the fact that stock markets function as highly efficient mechanisms for matching prices and quantities, albeit requiring a pre-assessment of demand before the IPO commences. Investors are typically required to express their interest in acquiring a specific number of shares at a designated price point before the IPO materializes.
In instances where demand surges, the actual allocation of shares to an investor may fall short of the initially requested amount. If demand remains low, signifying an undersubscribed IPO, the investor may secure the desired allotment at a reduced price.
However, lackluster demand often leads to a decline in share price subsequent to the IPO, indicating an oversubscribed allotment scenario