Penalty Bid


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.


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.

  1. Nasdaq

    A global electronic marketplace for buying and selling securities, ...
  2. Syndicate

    A professional financial services group formed temporarily for ...
  3. Freed Up

    1. A slang phrase used in the underwriting process to refer to ...
  4. Securities And Exchange Commission ...

    A government commission created by Congress to regulate the securities ...
  5. Initial Public Offering - IPO

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

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