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What is Greenshoe in share market?
In the share market, a Greenshoe option, also known as an "over-allotment option," is a financial mechanism that allows underwriters (typically investment banks) to stabilize the price of a newly issued stock after its initial public offering (IPO). The Greenshoe option grants the underwriters the right, but not the obligation, to issue additional shares to the public at the offering price within a specified timeframe, usually around 30 days.

When the demand for a newly issued stock is particularly strong, the price might surge significantly in the days following the IPO. The Greenshoe option gives underwriters the ability to meet this excess demand by issuing more shares at the offering price, effectively dampening extreme price fluctuations and supporting a more stable trading environment. This stabilizing effect can be beneficial for both the issuing company and investors, as it prevents wild price swings that could undermine market confidence.

The term "Greenshoe" originates from the first company to use this option, Green Shoe Manufacturing (now called Stride Rite Corporation), in the 1960s. The company's underwriters, led by the investment bank Lehman Brothers, introduced this mechanism to address the excess demand for its shares during the IPO.

In essence, the Greenshoe option serves as a risk management tool that underwriters can utilize to ensure a more controlled and orderly market for newly listed stocks, benefiting all parties involved in the IPO process.
The Greenshoe option is a mechanism in the share market that helps stabilize the price of a newly issued stock during its initial public offering (IPO). It allows underwriters to sell more shares than initially planned, typically up to 15% extra if there is high demand. This helps prevent excessive volatility in the stock price.

If the stock price rises significantly post-listing, underwriters exercise the Greenshoe option to release additional shares, satisfying demand. Conversely, if the price drops, underwriters buy back shares to support the stock price. This process ensures liquidity and reduces sharp fluctuations.

Named after Green Shoe Manufacturing (now Stride Rite), the first company to use it, the Greenshoe option is a common practice in IPOs to maintain market stability and investor confidence.

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