What is the Green Shoe Option?

 


The Green Shoe Option, also known as an overallotment option, is a provision in an initial public offering (IPO) that allows the underwriters to purchase additional shares from the company beyond the amount originally planned. This option is typically used to stabilize the price of the stock in the days following the IPO.

Definition

Green Shoe Option: A clause in the underwriting agreement of an IPO that allows underwriters to buy up to an additional 15% of the shares at the offering price.

Explanation

  • Purpose: The primary purpose of the Green Shoe Option is to provide price stability for the newly issued shares. It helps to counteract the effects of high demand and volatile price movements immediately after the IPO.
  • Mechanism: If the demand for the shares is high and the stock price rises above the offering price, underwriters can exercise the Green Shoe Option to purchase additional shares at the original offering price. This increases the supply of shares in the market, helping to stabilize the price. Conversely, if the stock price falls below the offering price, underwriters can buy back shares from the market to support the price.

Origin of the Term

The term "Green Shoe" comes from the Green Shoe Manufacturing Company (now known as Stride Rite Corporation), which was the first company to implement this option in its IPO.

See also: Download Bajaj Finserv App

Comments

Post a Comment

Popular posts from this blog

Intraday Trading Strategies for Quick Profits

Image
  Intraday trading is a type of trading where the trader buys and sells securities on the same day. In India, intraday trading is treated as business income and is taxed under the head 'Profits and Gains from Business or Profession'. Traders use various intraday trading strategies like technical analysis, stop loss, volume analysis, news trading, and scalping to make quick profits. However, intraday trading is a risky business and traders must keep a close eye on their profits and losses. If you are interested in intraday trading, take the time to research and understand all the pros and cons before getting started. See Also:  Download Bajaj Finserv app
Read more

Unleashing the Power of Nippon Mutual Fund Investments

Image
  Nippon Small Cap Fund is a mutual fund that invests primarily in small-cap companies to maximize returns and mitigate risks. The fund has a proven track record of delivering impressive returns and has consistently outperformed its benchmark index. The fund's skilled management team follows a disciplined investment approach, investing in fundamentally strong and high-growth companies. Nippon Small Cap Fund offers investors exposure to markets with excellent growth potential and helps minimize concentrated risks and volatility. Investors must evaluate the fund's objectives, risk factors, and investment style before investing.
Read more

Exper Tips: Mastering Mutual Funds for Wealth Growth

Image
  Mutual funds present substantial opportunities for wealth growth. Key strategies to master mutual funds for wealth growth include understanding mutual funds, choosing the right funds, diversification, opting for SIP , adopting a long-term investment approach and staying informed about market trends. However, all investments carry inherent risk and potential investors are advised to do a thorough research or seek professional advice before investing in mutual funds. Diversification, long-term perspective and regular investing could considerably mitigate the risk involved in the mutual fund investment. Download the  Bajaj Finserv App  for mutual fund investment.
Read more