Allocation and its types in investment activity
There are several uses in economic and financial terminology for allocation. Generally, it refers to the division of an asset in specific proportions, which allows each participant to receive the necessary portion of the financial instrument.
In most cases, investors use it when working with stocks and bonds. Allocation most often refers to the distribution of assets, cryptocurrencies and shares in IPOs. It is also a term for allocating banking products within a financial institution. The main objective of allocation is to carry out the separation process in such a way as to maximise the use of resources.
There are three variations of the concept in finance and management:
1. Resource allocation. Includes the allocation of a variety of resources, including human resources. It describes processes in management, public administration and business management.
2. Bank allocation. It is part of the organisation of an institution’s activities. It divides attracted assets into different areas, such as lending or savings programmes.
3. Asset allocation. Used to understand the specifics of investment portfolio management. It can also refer to a certain proportion when listing securities or cryptocurrencies.
It is essential to pay particular attention to this process in the investment sector.
Types of asset allocation
There are three types of asset this process in the stock market:
1. Strategic. The investor’s strategy is to find a certain ratio between traditional and alternative assets. This allocation has remained almost constant over time. The exception is rebalancing.
2. Tactical. In this case, the investor seeks to generate returns based on the dominance of a particular economic cycle. For example, they may buy stocks during a crisis to make money by selling them when the market recovers.
3. Mixed. The investor’s strategy may combine elements of tactical and strategic allocation. It is most commonly in use when assets are to be split between two separate portfolios.
To understand the essence of the term, it is vital to consider the allocation at the IPO. In most cases, companies receive many applications from investors when they go public. In this case, the company cannot satisfy all the requests and leaves a certain number of those who want to. The company determines how many shares it can sell to each applicant based on the amount of securities issued.
Many companies prefer to select large investors with a long-term investment horizon. Allotment in the context of an IPO refers to the allocation of shares that each of the chosen purchasers will have. The company plays a vital role in this process. It wants to maximise the benefits of the IPO. It is the company that allocates shares to the most promising buyers. These, in turn, can sell shares to smaller investors.
