What Is an Allotment?

The term allotment refers to the systematic distribution or assignment of resources in a business to various entities over time. Allotment generally means the distribution of equity, particularly shares granted to a participating underwriting firm during an initial public offering (IPO).

There are several types of allotment that arise when new shares are issued and allocated to either new or existing shareholders. Companies allot shares and other resources when demand is much stronger than the available supply.

Understanding Allotments

In business, allotment describes the systematic distribution of resources across different entities and over time. In finance, the term typically relates to the allocation of shares during a public share issuance. When a private company wants to raise capital for any reason (to fund operations, make a large purchase, or acquire a rival), it may decide to issue shares by going public. Two or more financial institutions usually underwrite a public offering. Each underwriter receives a specific number of shares to sell.

The allotment process can get somewhat complicated during an IPO, even for individual investors. That’s because stock markets are incredibly efficient mechanisms for matching prices and quantities, but the demand must be estimated before an IPO takes place. Investors must express interest in how many shares they would like to purchase at a specific price before the IPO.

If demand is too high, the actual allotment of shares received by an investor may be lower than the amount requested. If demand is too low, which means the IPO is undersubscribed, then the investor may be able to get the desired allotment at a lower price.

On the other hand, low demand often leads to the share price falling after the IPO takes place. This means that the allotment is oversubscribed.

Other Forms of Allotment

An IPO is not the only case of share allocation. Allotment can also occur when a company’s directors earmark new shares to predetermined shareholders. These are investors who have either applied for new shares or earned them by owning existing shares. For example, the company allocates shares proportionately based on existing ownership in a stock split.

Companies allot shares to their employees through employee stock options (ESOs). This is a form of compensation that companies offer to attract new and keep existing employees in addition to salaries and wages. ESOs incentivize employees to perform better by increasing the number of shares without diluting ownership.

Rights offerings or rights issues allocate shares to investors who wish to purchase more rather than doing so automatically. Thus, it gives investors the right but not the obligation to purchase additional shares in the company. Some companies may elect to do a rights issue to the shareholders of a company they want to acquire. This allows the acquiring company to raise capital by giving investors in the target firm an ownership stake in the newly formed company.

Reasons for Raising Shares

The number one reason a company issues new shares for allotment is to raise money to finance business operations. An IPO is also used to raise capital. In fact, there are very few other reasons why a company would issue and allocate new shares.

New shares can be issued to repay a public company’s short- or long-term debt. Paying down debt helps a company with interest payments. It also changes critical financial ratios such as the debt-to-equity ratio and debt-to-asset ratio. There are times when a company may want to issue new shares, even if there is little or no debt. When companies face situations where current growth is outpacing sustainable growth, they may issue new shares to fund the continuation of organic growth.

Company directors may issue new shares to fund the acquisition or takeover of another business. In the case of a takeover, new shares can be allotted to existing shareholders of the acquired company, efficiently exchanging their shares for equity in the acquiring company.

As a form of reward to existing shareholders and stakeholders, companies issue and allot new shares. A scrip dividend, for example, is a dividend that gives equity holders some new shares proportional to the value of what they would have received had the dividend been cash.

Overallotment Options

There are options for underwriters where additional shares can be sold in an IPO or follow-on offering. This is called an overallotment or greenshoe option.

In an overallotment, underwriters have the option to issue more than 15% shares than the company originally intended to do. This option doesn’t have to be exercised the day of the overallotment. Instead, companies can take as long as 30 days to do so. Companies do this when shares trade higher than the offering price and when demand is really high.

Overallotments allow companies to stabilize the price of their shares on the stock market while ensuring it floats below the offering price. If the price increases above this threshold, underwriters can purchase the additional shares at the offering price. Doing so ensures they don’t have to deal with losses. But if the price falls below the offering price, underwriters can decrease the supply by purchasing some of the shares. This may push the price up.

Who Is Alan Greenspan?

Alan Greenspan is an American economist who was the chair of the Board of Governors of the Federal Reserve (Fed), the United States’ central bank, from 1987 until 2006. In that role, he also served as the chair of the Federal Open Market Committee (FOMC), which is the Fed’s principal monetary policymaking committee that makes decisions on interest rates and managing the U.S. money supply.

Greenspan is best known for largely presiding over the Great Moderation, a period of relatively stable inflation and macroeconomic growth, that lasted from the mid-1980s to the financial crisis in 2007.

Early Life and Education

Alan Greenspan was born in New York City on March 6, 1926. He received his bachelor’s, master’s, and doctoral degrees in economics, all from New York University, as well as studying economics at Columbia University in the early 1950s under Arthur Burns, who would later serve two consecutive terms as chair of the Board of Governors of the Fed.

Greenspan’s first job, in 1948, was not in government but for a non-profit analyzing demand for steel, aluminum, and copper. After this, Greenspan ran an economic consulting firm in New York City, Townsend-Greenspan & Co., Inc., from 1954 to 1974 and 1977 to 1987. Greenspan began his career in the public sector in 1974 when he served as chair of the President’s Council of Economic Advisers (CEA) under President Gerald Ford.

In 1987, Greenspan became the 13th chair of the Fed, replacing Paul Volcker. President Ronald Reagan was the first to appoint Greenspan to the office, but three other presidents, George H.W. Bush, Bill Clinton, and George W. Bush, named him to four additional terms. His tenure as chair lasted for more than 18 years before he retired in 2006 to be replaced by Ben Bernanke. After leaving, he published his memoir, The Age of Turbulence, and began his own Washington DC-based consulting firm, Greenspan Associates LLC. 

Alan Greenspan was known as being adept at gaining consensus among Fed board members on policy issues and for serving during one of the most severe economic crises of the late 20th century, the aftermath of the stock market crash of 1987. After that crash, he advocated for sharply slashing interest rates to prevent the economy from sinking into a deep depression.

Alan Greenspan’s Policies and Actions

Greenspan presided over one of the most prosperous periods in American history—thanks in no small part, supporters feel, to his helming of the Fed. Still, some of his policies and actions were controversial, either at the time or in retrospect.

Views on Inflation

Early in his career, Greenspan developed a reputation for being hawkish on inflation, in part due to his advocacy for a return to the gold standard in monetary policy in the 1967 essay “Gold and Economic Freedom.” 

His allegedly “hawkish” stance was portrayed by early critics as a preference for sacrificing economic growth in exchange for preventing inflation. Greenspan eventually reversed those views as Fed chief; in a 1998 speech, he conceded that the new economy might not be as susceptible to inflation as he had first thought.

In practice, Greenspan’s supposedly hawkish approach was flexible, to say the least. He was clearly willing to risk inflation under conditions that could create a severe depression and certainly pursued a generally easy money policy relative to his predecessor, Paul Volcker. In particular, in the early 2000s, Greenspan presided over cutting interest rates to levels not seen in many decades.

Flip-Flop on Interest Rates

In 2000, Greenspan advocated reducing interest rates after the dot-com bubble burst. He did so again in 2001 after 9-11, the World Trade Center attack. Following 9-11, Greenspan led the FOMC to immediately reduce the Fed funds rate from 3.5% to 3%, and, in the following months, he worked toward lowering that rate to a record (at the time) low of 1.13% and holding it there for a full year.

Some criticized those rate cuts as having the potential to inflate asset price bubbles in the U.S. Greenspan’s pro-inflationary policies, particularly during this period, are today generally understood to have contributed to the U.S. housing bubble, subsequent subprime mortgage financial crisis, and the Great Recession, though this is of course disputed by Greenspan and his allies.

Encouraging Adjustable-Rate Mortgages

In a 2004 speech, Greenspan suggested more homeowners should consider taking out adjustable-rate mortgages (ARMs) where the interest rate adjusts itself to prevailing market interest rates. Under Greenspan’s tenure, interest rates subsequently rose as inflation accelerated. This increase reset many of those mortgages to much higher payments, creating even more distress for many homeowners and exacerbating the impact of that crisis.

The “Greenspan Put”

The “Greenspan put” was a monetary policy strategy popular during the 1990s and 2000s under Greenspan. Throughout his reign, he attempted to help support the U.S. economy by actively using the federal funds rate to aggressively lower interest rates to fight the deflation of asset price bubbles.

The Greenspan put created a substantial moral hazard in financial markets. Informed investors could expect the Fed to take predictable actions that would bailout investor’s losses, which distort the incentives of market participants. This created an environment where investors were encouraged to take excessive risk because Fed monetary policy tended to inherently limit their potential losses in the event of a market downturn in an analogous way to buying put options on the open market.

The Bottom Line

Like many other government officials, the success of Alan Greenspan’s five terms as Chair of the Fed will depend on who you ask. However, it is certainly true that Greenspan faced some massive challenges during his tenure, such as the 1987 stock market crash and the attacks on the World Trade Center.

Overall, Greenspan helped usher in a strong U.S. economy in the 1990s. Opinion on how much his actions caused the economic recession that began shortly after his term ended varies.

What is an Aggressive Investment Strategy?

An aggressive investment strategy typically refers to a style of portfolio management that attempts to maximize returns by taking a relatively higher degree of risk. Strategies for achieving higher than average returns typically emphasize capital appreciation as a primary investment objective, rather than income or safety of principal. Such a strategy would therefore have an asset allocation with a substantial weighting in stocks and possibly little or no allocation to bonds or cash.

Aggressive investment strategies are typically thought to be suitable for young adults with smaller portfolio sizes. Because a lengthy investment horizon enables them to ride out market fluctuations, and losses early in one’s career have less impact than later, investment advisors do not consider this strategy suitable for anyone else but young adults unless such a strategy is applied to only a small portion of one’s nest-egg savings. Regardless of the investor’s age, however, a high tolerance for risk is an absolute prerequisite for an aggressive investment strategy.

Understanding Aggressive Investment Strategy

The aggressiveness of an investment strategy depends on the relative weight of high-reward, high-risk asset classes, such as equities and commodities, within the portfolio.

For example, Portfolio A which has an asset allocation of 75% equities, 15% fixed income, and 10% commodities would be considered quite aggressive, since 85% of the portfolio is weighted to equities and commodities. However, it would still be less aggressive than Portfolio B, which has an asset allocation of 85% equities and 15% commodities.

Even within the equity component of an aggressive portfolio, the composition of stocks can have a significant bearing on its risk profile. For instance, if the equity component only consists of blue-chip stocks, it would be considered less risky than if the portfolio only held small-capitalization stocks. If this is the case in the earlier example, Portfolio B could arguably be considered less aggressive than Portfolio A, even though it has 100% of its weight in aggressive assets.

Yet another aspect of an aggressive investment strategy has to do with allocation. A strategy that simply divided all available money equally into 20 different stocks could be a very aggressive strategy, but dividing all money equally into just 5 different stocks would be more aggressive still.

Aggressive Investment strategies may also include a high turnover strategy, seeking to chase stocks that show high relative performance in a short time period. The high turnover may create higher returns, but could also drive higher transaction costs, thus increasing the risk of poor performance.

Aggressive Investment Strategy and Active Management

An aggressive strategy needs more active management than a conservative “buy-and-hold” strategy, since it is likely to be much more volatile and could require frequent adjustments, depending on market conditions. More rebalancing would also be required to bring portfolio allocations back to their target levels. Volatility of the assets could lead allocations to deviate significantly from their original weights. This extra work also drives higher fees as the portfolio manager may require more staff to manage all such positions.

Recent years have seen significant pushback against active investing strategies. Many investors have pulled their assets out of hedge funds, for example, due to those managers’ underperformance. Instead, some have chosen to place their money with passive managers. These managers adhere to investing styles that often employ managing index funds for strategic rotation. In these cases, portfolios often mirror a market index, such as the S&P 500.

What Is Aggregation?

Aggregation in the futures markets is a process that combines of all futures positions owned or controlled by a single trader or group of traders into one aggregate position. Aggregation in a financial planning sense, however, is a time-saving accounting method that consolidates an individual’s financial data from various institutions.

Aggregation is increasingly popular with advisors when servicing clients’ accounts, as they are able to discuss the accounts with the client in a cleaner, more easily understood way before they break down the account into its respective categories.

How Aggregation Works

Financial advisors use account-aggregation technology to gather position and transaction information from investors’ retail accounts held at other financial institutions. Aggregators provide investors and their advisors with a centralized view of the investor’s complete financial situation, including daily updates.

Financial planners handle both managed and non-managed accounts. Managed accounts contain assets under the advisor’s control that are held by the advisor’s custodian. The planners utilize portfolio management and reporting software to capture a client’s data through a direct link from the custodian. It is important for the planner to have all the accounts because aggregating them without the complete collection would paint an inaccurate picture of that client’s finances.

Additionally, non-managed accounts contain assets that are not under the advisor’s management but are nevertheless important to the client’s financial plan. Examples include 401(k) accounts, personal checking or savings accounts, pensions, and credit card accounts.

The advisor’s concern with managed accounts is lack of accessibility when the client does not provide log-in information. Advisors cannot offer an all-encompassing approach to financial planning and asset management without daily updates on non-managed accounts.

Importance of Account Aggregation

Account aggregation services solve the issue by providing a convenient method for obtaining current position and transaction information about accounts held at most retail banks or brokerages. Because investors’ privacy is protected, disclosing their personal-access information for each non-managed account is unnecessary.

Financial planners use aggregate account software for analyzing a client’s total assets, liabilities, and net worth; income and expenses; and trends in assets, liability, net worth, and transaction values. The advisor also assesses various risks in a client’s portfolio before making investment decisions.

Effects of Account Aggregation

Many aggregation services offer direct data connections between brokerage firms and financial institutions, rather than using banks’ consumer-facing websites. Clients give financial institutions their consent by providing personal information for the aggregate services.