Wrong IPO valuation can dramatically boost volatility on either side. These surprising ways to control IPO share price volatility are unbeatable.
IPO stock valuation is a difficult task that requires a lot of considerations. A company or investment bankers can go for wrong valuations of its share price either intentionally or unintentionally.
If they fail to include even a single factor during IPO valuation then it can lead to wild moves on listing day. The share price will ultimately settle around its right valuations. This process may usually take few days to few months. In such a scenario, we often say “stock market is always right”.
But, this unrealistic volatility is not good for the company in the long run. Therefore, company management & investment bankers try their best efforts to curb stock price fluctuations. Here are 10 shocking methods to curb or stabilize IPO stock price volatility:
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(1) Greenshoe Options To Control Stock Rise
It is one of the best ways to control IPO share price volatility. Greenshoe option or clause is a legal mechanism contained in underwriting agreement of an initial public offering (IPO).
In red herring prospectus (company prospectus), greenshoe is referred as “over-allotment option”. It is because extra shares are set aside for underwriters in addition to shares offered originally.
It allows underwriters (investment banks & brokerage agencies) to buy up an additional 15% of equities at the offering price of the IPO. The underwriters can exercise this option if public demand for IPO shares exceeds expectations & stock trades above offering price.
This is the only permitted means by stock exchange regulators to stabilize the IPO price after determining offering price.
For example, Facebook IPO in 2012 where underwriters had agreed to sell 421 million shares of the company at $38. Due to strong demand, they exercised greenshoe option to sell 484 million shares.
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