What is 'Cheap Stock'

Cheap stock refers to equity awards issued to employees ahead of a public offering at a value which is less than fair value to the IPO stock price. A company that has not yet issued public stock may issue equity awards to employees in the form of employee stock options (ESO) or restricted stock unit (RSU). These common forms of equity compensation for executives and other employees become “cheap stock” if the same securities are sold at a significantly higher price in the subsequent IPO.

BREAKING DOWN 'Cheap Stock'

Company stock that is not traded publicly and is granted as an award is valued based on internal accounting and valuations made by the firm, and often referred to as cheap stock. When a company decides to go public, a lengthy process begins that includes a Securities and Exchange Commission (SEC) review of offering documents. During its review, the SEC looks at stock-based awards granted during the most recently completed fiscal year and interim period. The SEC compares the estimated IPO price range provided by the company to a weighted average exercise price of equity awards and may issue comments asking the company to explain a change in value between the two.

Companies often disclose the IPO price range in a subsequent amendment to the preliminary prospectus, and this can further complicate accounting and comments from the SEC. One risk is that the company will have to record cheap stock charges on its income statement.

RELATED TERMS
  1. Restricted Stock

    Restricted stock refers to insider holdings that are under some ...
  2. Cash Awards

    Cash awards are awards given to employees in the form of money ...
  3. Employee Stock Option - ESO

    An employee stock option (ESO) is a stock option that offers ...
  4. SEC Form S-8

    A filing with the Securities and Exchange Commission (SEC) that ...
  5. Equity Compensation

    Equity compensation is non-cash pay that is offered to employees, ...
  6. SEC Form 424B4

    SEC Form 424B4 is the prospectus form that a company must file ...
Related Articles
  1. Investing

    Fidelity Launches Equity Compensation Tool for Employees

    Fidelity is taking the guesswork out of equity compensation, launching a new tool for employees.
  2. Trading

    Should Employees Be Compensated With Stock Options?

    Learn the good, the bad and the ugly sides of this type of payout.
  3. Financial Advisor

    How To Get A Job At The SEC

    Want to make a good living taking on those renegade trading rascals on Wall Street? Here are some tips to help you get in the door at the SEC.
  4. Investing

    How to Navigate Stock Options Offer At a New Job

    This is what you need to keep in mind when evaluating a stock options offer from a new employer.
  5. Retirement

    A Guide to Employee Stock Option Plans

    Stock option plans are among the ways employers can compensate employees. Here's how they work.
  6. Managing Wealth

    Get The Most Out Of Employee Stock Options

    Stock options can be lucrative for employees who know how to avoid unnecessary taxes.
  7. Investing

    E*TRADE Launches Tax Tools to Clarify Equity Compensation

    E*TRADE launched new tax tools to help investors better understand the tax implications of equity compensation.
  8. Trading

    Avoid Premature Exercise Of Employee Stock Options

    With early exercise, you forfeit some profit back to your employer and incur an income tax penalty.
RELATED FAQS
  1. How Do Insiders Buy Stock at Below Market Value?

    Stock options allow executives and key employees to buy stock at a price below market value. Read Answer >>
  2. What is the difference between an IPO and a seasoned issue?

    Learn how companies issue IPO securities when they first go public and seasoned issue shares if they sell more shares in ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center