Definition: An allotment generally represents a small fraction of the total class of shares held by a prospective investor. It is intended to provide investors with an early opportunity to purchase additional shares. In addition, an allotment means that shares of our company’s stock are held in reserve for future delivery. The application for the allotment typically states how much the holder may acquire in the offering and the terms under which future delivery may occur.
When you buy shares in an IPO, the underlying stock is called an ‘allotment,’ and the money remains available for you to purchase additional shares at any time during the offering period.
Allotment is a type of stock split in which companies distribute shares to their stockholders in dividends. Allotment can be used to distribute earnings during a period in which there is neither a change in ownership nor a legally binding contract fixing the terms of the share. The allocation method is less costly than a formal merger or reverse stock split and provides for more rapid shareholder approval, thus facilitating the quicker stock transaction between two parties.
When a business undergoes a stock split, the stock represents all the outstanding stock and rights owned by the company before the split. The split takes place when there is a need to increase the number of shares outstanding in the market so that fewer securities are available for sale and more can be secured against a claim if a claim is made on any of the company’s assets. As a result, some assets may become available for sale after the split, while others remain owned by the company. Allotment occurs when the exercise price for security (the amount paid for the stock) is lower than its par value. This means that after the split, the market values some securities more than others.
When a company issues a new share, it generally does so for two reasons. First, fundraising needs are usually simple and straightforward and can typically be addressed with a few hundred additional shares. Second, issues related to actual growth are more complex and require more than five hundred additional shares. In either situation, the basic details of any given allotment remain the same—there is usually a fixed amount of shares outstanding, and any change in the number of shares outstanding generally results in a reduction in the value of that share—but the underlying goal– raising money to expand business operations — can vary widely depending on the circumstances.
If the company goes public and sells a large number of shares, the initial offering price may be artificially low due to over-demand. Investors may find it challenging to sell their shares at a lower price and get a good deal. The result may be under-pricing of the stock and underperformance by the company. If demand is high, but supply is limited, then prices may be higher. If there are too many shares for anyone to buy, prices may be reduced to attract more purchasers.
The process of creating allotment stock is a complex one. The actual process of buying allottees is more pronounced, but many shareowners are confused and may question why a company would want to issue new shares. Allotment sales cover the cost of zoning, construction, permits, and taxes and generally fund ongoing operations. Typically, allotment is used to finance capital expenditures, including ongoing product development and R&D, real estate development, facility support, inventory management, and other core business functions. The issue with allotted shares is that they can also be used to finance venture development and other types of projects.
Allotments are used strategically throughout a business’s operations to allocate resources to improve or maintain efficiency. The allocation may be physical (moving equipment or supplies) or using computer technology to allocate resources (clicking buttons on a website) strategically. Allotments reduce the company’s overall cost and create opportunities for improvement in efficiency where there was none before. This all-in-one approach to business operations includes resource planning, allocation, and management.