Undersubscribed (IPO) – Definition

Cite this article as:"Undersubscribed (IPO) – Definition," in The Business Professor, updated July 31, 2019, last accessed August 10, 2020, https://thebusinessprofessor.com/lesson/undersubscribed-ipo-definition/.


Undersubscribed Definition

In stock exchange or security market, undersubscribed is a situation where there is less demands of shares than the number of shares available in an initial public offering. When there is less subscription for an IPO and there are surplus securities to be traded, it is undersubscribed.  When an IPO has less buyers than the shares being issued, there is an underbooking also called undersubscribed. Usually, when the securities available for sale are overpriced, it can cause many investors not to want to buy the available shares, this situation is called undersubscribed.

A Little More on What is Undersubscribed

The inability of an underwriter to get enough buyer for the number of shares available for sale in an initial public offering refers to undersubscribed. When the number of shares available surpass the number of buyers that show interest in purchasing the shares, underbooking has occurred. In a typical public offering (IPO), securities are traded at exact prices, thereby, underwriters do not experience shortage or surplus oc securities.

In the case on undersubscribed, there is a surplus of securities and fewer number of buyers. Overpricing is a major contributing factor that causes underbooking. An underwriter will set lesser subscription for an issue if the prices are too high. The shares in the IPO will therefore be undersubscribed.

Factors that Can Cause an Underbooking

Usually, if high prices are set for stocks, shares or securities being offered in an IPO, investors can refrain from subscribing to the offer. When this happens, the underwriter will experience an underbooking or undersubscribed. In this case, there are more shares to be sold that the investors that have shown interest in buying the shares. Excess number of shares and limited number of buyers or subscribers cause undersubscribed.

References for “Undersubscribed

Academic research for “Undersubscribed

[CITATION] Securities broker E&O coverage undersubscribed., Kochaniec, J. W. (1999). Securities broker E&O coverage undersubscribed. Business Insurance, 33(45), 20-21.

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