Penalty Bid

AAA

DEFINITION of 'Penalty Bid'

A bid, or offer to purchase securities, provided by a lead underwriter or other member of a syndicate as part of early IPO trading. The bid comes with the restrictions; if it is used, a penalty will be assessed to the broker offering the shares back to the underwriter. The penalty bid is created to deter investors from "flipping" IPO shares shortly after trading begins.

INVESTOPEDIA EXPLAINS 'Penalty Bid'

This penalty may be passed on from the broker to the client selling the IPO shares, but typically involves the broker returning some or all of the internal commission income back to the underwriting syndicate. At the very least, a broker whose client insists on selling shares back and incurring the penalty bid will not be pleased with the client, and will be unlikely to refer IPO shares back to that client in the future.

RELATED TERMS
  1. Nasdaq

    A global electronic marketplace for buying and selling securities, ...
  2. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs ...
  3. Underwriting

    1. The process by which investment bankers raise investment capital ...
  4. Syndicate

    A professional financial services group formed temporarily for ...
  5. Securities And Exchange Commission ...

    A government commission created by Congress to regulate the securities ...
  6. Freed Up

    1. A slang phrase used in the underwriting process to refer to ...
Related Articles
  1. Brokerage Functions: Underwriting And ...
    Brokers

    Brokerage Functions: Underwriting And ...

  2. A Look At Primary And Secondary Markets
    Investing Basics

    A Look At Primary And Secondary Markets

  3. 5 Tips For Investing In IPOs
    Investing

    5 Tips For Investing In IPOs

  4. IPO Basics Tutorial
    Retirement

    IPO Basics Tutorial

comments powered by Disqus
Hot Definitions
  1. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  4. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  5. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center