In Finance, what is Assimilation?

Assimilation in the financial world is a process in which a new security issue sells in entirety, leaving underwriters without any shares leftover. The public absorbs the issue completely and begins trading the security on the secondary market, buying and selling it like any other security. Assimilation is highly desirable because it indicates that there is a healthy demand for a newly issued security.

In the example of stocks, in which people buy a share of equity in a company, a company usually does not sell stocks directly to the public. Instead, it works with an underwriting syndicate. The underwriters accept the responsibility for distributing the security issue, taking on the risk that they may not be able to sell the issue in totality, in exchange for a chance at profit on the difference between the price they pay for it and the price they manage to command on the open market.

Once the details of the deal are worked out and the underwriters begin selling the security, typically to brokerage houses, institutional investors, and other major investors, the process of assimilation can begin. If an offering is assimilated, the underwriters are left with no unsold shares and the security has been completely absorbed by the market. If assimilation does not occur, the underwriters are forced to retain shares and attempt to sell them in the future.

Companies which set a good price for an initial public offering and are believed to be up and coming will generally attract a great deal of interest from the investing public. These companies can usually count on rapid public absorption of their stocks, which may in turn drive up their value as members of the public compete to buy shares after assimilation has occurred. On the other hand, a company which sets a price which is too high or is deemed to be a questionable investment may find that when it offers a new issue of securities, investors are not interested, and the underwriters may not be able to sell the whole issue.

When new securities issues are made, the financial press usually follows them closely and for major companies the regular media may keep track of trading activities as well. Companies try to time new offerings carefully to hit the market at a time when investors are active and excited about new issues. However, sometimes events intervene. Since these events are scheduled well in advance, it is impossible to control for situations such as acts of war or other major breaking news which distract investors and reduce consumer confidence, leading to less interest in new securities.