A greenshoe option is a mechanism used in initial public offerings – IPOs – and other equity capital raisings that enables the underwriters to try and stabilise the stock price and smooth out price volatility after a deal starts trading. It is, in effect, an over-allotment option. For example, in an IPO, the broker dealers will place the greenshoe shares in addition to the main IPO shares with investors (typically 10-15% of an IPO). If they buy ‘greenshoe’ shares back in the market, helping to stabilise the stock price, then they will only exercise the greenshoe option on the shares they have not bought back. So in effect, it gives underwriters the facility to acquire more shares from the issuing company or from a shareholder if needed.


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