The IPO Lottery, How To Pick Winners

As demand for IPO shares increases, more investors than ever are experiencing non-allocation of lots. Even in cases where two acquaintances apply for shares, one may win, while the other loses. This article discusses how IPO lottery winners are chosen and the circumstances that lead to allocation draws.

Why Would an IPO Draw Take Place?

In an IPO, an algorithm is used to organize all bids from investors. If the number of shares is equal to or lower than the number of applications, every investor gets a cut. When the number of applications is greater than the number of shares available, the IPO is said to be oversubscribed. As such, a draw must take place to allocate the shares to lucky winners.

Oversubscription Procedures

With a small-scale oversubscription, where there isn't an overwhelming number of applications, all applicants are allocated at least one lot. This means they may have applied for two, three, four, or five, but only receive one. The remaining shares are divided out proportionately. Nonetheless, all successful applications get a share.

In the instance of a large-scale oversubscription, where there aren't enough shares to allot each person at least one, a lucky draw takes place.

How Are IPO Lottery Winners Picked?

In instances where the IPO is oversubscribed, the computer algorithm impartially selects winners. The IPOs are allocated at random, with no regard for background or circumstance, so winning is purely based on luck. There's nothing an applicant can do to improve their chances of being chosen as a lottery winner.

Why Do IPO Bids Fail?

There are three reasons an IPO bid fails. Firstly, the computer algorithm may deem the application invalid due to an admin error or not following the IPO's rules. Alternatively, the IPO was oversubscribed, went into a lucky draw, and shares were allocated to other investors.

Finally, an IPO must be at least 90% subscribed for it to list on the stock market. If it hasn't reached this threshold, the IPO is withdrawn, and investors receive refunds.