The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site. Please see our Subscription Terms and Conditions.

All material subject to strictly enforced copyright laws. © 2022 Euromoney, a part of the Euromoney Institutional Investor PLC.

This is how an IPO greenshoe works

There is often confusion around the workings of the over-allotment option; there shouldn’t be.

Mark Baker on capital markets 1920px

It’s nearly the end of the year, so how about an alternative award?

Award category: Least-Understood-And-Yet-Easy-To-Understand-Capital-Markets-Thing

Winner: The Greenshoe

As the recent Aramco IPO has shown yet again, the greenshoe (or over-allotment option, to give it its proper name) still proves confusing to some. That's surprising, because there's not really a whole lot to grasp.

Underwriters routinely over-allocate IPOs, typically by 15%. They do this by short-selling the extra shares, borrowing them from some investors in order to allocate them to others. This means the underwriters have a short position (at issue price) that at some point they will have to close out.

The reason the underwriters do all this is to give them the flexibility to stabilize the market price of the shares once they start trading. Since they are already short, they can happily buy stock in the market up to the size of their short position, knowing that those shares are already spoken for.

If the shares fall in the secondary market when it starts trading, the underwriters can cover their short by buying shares in the market and delivering them back to the investors they borrowed them from. If they do this they make a profit, since they have allocated the shares at issue price but are buying them in the market at below issue price.

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.


Unlimited access to and

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually


Unlimited access to and, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors


Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree