An IPO allocation refers to the process by which shares of a newly public company are distributed among various investors. This critical step determines how both institutional and retail investors can participate in the IPO.

Understanding IPO Allocation:

The allocation process is influenced by several factors, including investor demand, the type of offering, and regulatory guidelines. Typically, shares are divided among different categories of investors:

• Institutional Investors: Such as mutual funds, pension funds, and insurance companies, often receive a substantial portion of the allocation due to their significant purchasing power and long-term investment strategies.
• Retail Investors: Individual investors may receive a smaller portion of the allocation. In certain types of IPOs, like those involving master limited partnerships (MLPs) or real estate investment trusts (REITs), retail investors might have a better chance of receiving allocations.

Allocation Methods:

The method of allocation can vary based on the level of subscription:

• Undersubscribed IPOs: When the number of shares offered exceeds investor demand, all applicants typically receive the full number of shares they requested.
• Oversubscribed IPOs: When demand surpasses the number of available shares, allocation methods may include:
  • Proportionate Basis: Shares are distributed in proportion to the amount each investor applied for.
  • Lottery System: In some cases, especially for retail investors, a computerized lottery may determine the allocation to ensure fairness.

Factors Influencing Allocation:

Several factors can impact how shares are allocated:

• Type of Offering: Certain IPOs, such as those involving MLPs, REITs, or business development companies (BDCs), may be more retail-focused, potentially increasing the likelihood of allocation to individual investors.
• Directed Share Programs: Some issuers may reserve a portion of shares for specific groups, such as company employees, existing investors, or affiliates, which can reduce the number of shares available to the general public.

Steps in the IPO Allocation Process:

1. Investor Categorization: Investors are classified into categories, such as retail individual investors (RIIs) and non-institutional investors (NIIs).
2. Bid Collection: Investors submit bids within the IPO subscription period, indicating the number of shares and the price they are willing to pay.
3. Allocation: Shares are allocated based on the bid information and the categorization of investors.
4. Finalization: After the IPO closes, shares are allotted to successful bidders in accordance with regulatory guidelines.
5. Debit of Amount: Allocated shares are credited to investors' demat accounts, and the corresponding amount is debited from their bank accounts.
6. Refund: For applicants who do not receive any shares, the reserved amount is unblocked or refunded.

Considerations for Investors:

• Application Accuracy: Ensure that IPO applications are complete and accurate to avoid disqualification.
• Multiple Applications: Submitting multiple applications under the same name can lead to rejection; adhere to the guidelines provided by the issuing company.
• Stay Informed: Monitor communications from the registrar or your brokerage firm regarding allocation status and any necessary actions post-allocation.

Understanding the IPO allocation process is essential for investors seeking to participate in new public offerings. By familiarizing themselves with the factors and methods involved, investors can better navigate the complexities of IPO investments.

Trading in the IPO subsequent to its offering is called the aftermarket. Trading volume in IPOs is extremely high on the first day (typically ~70% of the float) due to flipping and aftermarket orders. Trading volume can decline precipitously in the following days.

The price appreciation (or depreciation) in IPOs is measured from the offering price going forward. However, some investors also track returns from the first day close in order to get a better benchmark of IPO performance. While investors often need allocations to capture first-day returns, aftermarket performance is available to anyone.