How does a Green Shoe Option work

Greenshoe: Stock replenishment at the same rate

Not everyone immediately suspects the term “greenshoe” to be a technical term from the stock exchange sector. But many new issues - i.e. the first issue of a share - are accompanied by this word.

If the demand for shares is higher than the supply, the banks involved in the IPO (called syndicate banks) can issue further securities. For example, the greenshoe - named after the American shoe company "Green Shoe Manufacturing Company" - is of interest to investors who did not strike fast enough when they went public.

Greenshoe as a reserve when shares are first issued

The greenshoe is a so-called allocation reserve. This reserve is agreed in advance between the issuer of the share and the bank involved in the IPO (syndicate bank).

Above all, this comes into play in the case of a new issue that is in high demand and where demand is higher than supply. The greenshoe then gives the publisher the opportunity to throw additional stocks or bonds onto the market. In this way, the demand is satisfied and the course stabilized at the same time.

This option can be exercised up to 6 weeks after the IPO. Investors do not have to fear being taken advantage of: The additional securities are issued at the original price and under the same conditions as the stocks and bonds at the time of the stock market launch.

Example for Greenshoe - Deutsche Telekom

The American shoe company “Green Shoe Manufacturing Company” was the first company to have a share reserve in hand when it went public in order to be able to meet increased demand. Although the company disappeared from the scene, the process conquered the stock market world.

An example from Germany: Deutsche Telekom also adopted the process. When it became clear that the T-share would get off to a good stock market start, Deutsche Telekom added 100 million shares as a greenshoe.

Course stability is an advantage of the greenshoe

The flexibility with which publishers and banks can regulate supply and demand on the stock market can be seen as a great advantage. If there is strong demand, the offer is expanded, if the price trend is weak, the greenshoe is simply not used.

Securing course stability is another advantage of the greenshoe. If the demand rises above the supply, additional shares are thrown onto the market and strong price fluctuations can be avoided.

However, investors should also pay attention to the origin of the share reserve. The greenshoe often consists of old stocks, for example from investors or consortium banks.

However, sometimes the reserve is also issued by an additional capital increase of the public company. These new stocks quickly give investors the impression that their equity holdings are being watered down.

Conclusion: Greenshoe strengthens flexibility

Greenshoes are often used for new issues. With this procedure, issuers can react flexibly to strong demand. Stable share prices can also be offered with a greenshoe. For investors, a greenshoe often means an opportunity for a good capital investment.

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