Reverse Greenshoe Option

  

Categories: IPO

An IPO is kind of like the moment when a parent takes the training wheels off their kid's bike for the first time. They run alongside the bike for the first few feet, but eventually let go, standing proudly in the street as their kid rides off into the distance.

The reverse greenshoe option is there in case the kid runs directly into a parked car.

In an initial public offering, a company lists its stock on a public exchange for the first time. Typically, there's an offering price, which is the price at which the stock first goes public. Then the shares are off, trading moment to moment, day to day, like any other stock. (That's the "let go of the bike" moment.)

A well-managed IPO will see shares rise early in their trading career. Market demand will be higher than the amount of stock offered. No one wants their stock to go public at $15 and instantly drop to $13. It shows a lack of confidence by the market, and doesn't allow much room to pay off those folks who got in on the deal early, buying shares at the offering price.

Ideally, the stock will see an initial bump...go public at $15 and rise to $17. That situation evidences a much healthier supply/demand dynamic.

A reverse greenshoe option is used to support the share price in case demand for the stock turns out to be lighter than expected. The provision allows the underwriters of the offering (the people running the IPO) to sell shares back to the company. Basically, they can take shares off the market and send them back to the company. The lower supply makes the existing float more valuable (because there are fewer shares to go around), supporting the stock price.

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Finance: What is an IPO?25 Views

00:00

And finance allah shmoop What is an i p o

00:07

Well this is a hippo and it has nothing to

00:09

do with an ipo Auras Normal humans pronounce it if

00:12

both well actually most people just spell it out I

00:15

po It stands for initial public offering In the three

00:19

words tell the story and i pl refers to a

00:21

company who's raising money by selling shares of itself to

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the public for the first time a maiden voyage in

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public funding if you will Whatever dot com has forty

00:35

million shares outstanding after three private rounds with venture capitalists

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and private investors it wants to raise money to go

00:41

big internationally And for the first time it will offer

00:44

shares to joe and jill public And that means that

00:48

all of it shares will be tradable publicly on the

00:51

open market like on nasdaq or the new york stock

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exchange That is the insiders early investors founders et cetera

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will be able to just call their broker at schwab

01:01

or fidelity or wherever and sell their shares get liquid

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and buy themselves a maserati because it's not what everyone

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does after a nice meal So whatever dot com sells

01:11

ten million shares a twelve bucks each to raise one

01:13

hundred twenty million dollars which they can spend to build

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out offices all over the world So yeah that's an

01:18

ai po and that's Why a company generally wants to

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make shares available to the public because once you've made

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an initial public offering and you make money off the

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sales of your stock you khun by as many hippos

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as you like and just remember to feed them three

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times a day they get Cranky if they go too 00:01:35.158 --> [endTime] long in between No

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