DEFINITION of 'Friendly Hands'

Friendly hands is a nickname for investors in an initial public offering (IPO) who will likely hold onto the security for a long time. Friendly hands are not interested in purchasing the new issue with the hopes of flipping the shares for a quick profit. Long-term investment in IPOs tends to reduce stock volatility, thus promoting stability that could draw in other investors who care about a base of stock supporters with extended time horizons.

BREAKING DOWN 'Friendly Hands'

In a book-building process for an IPO, the underwriter(s) will traverse the country (or world in some cases) with members of company management on what are known as road shows. The intent is to market new shares to serious institutional investors who will place large blocks of shares in long-term portfolios. Companies that go public for the first time do not want their stock to be played with, and the underwriter(s) and distribution group prefer not to engage in price stabilization upon launching of the IPO into the market. Therefore, as much as possible, allocations of a limited number of available shares will be directed into friendly hands. The opposite of friendly hands is a flipper, who is more interested in profiting from a hot IPO issue by selling it almost immediately after purchasing it from the underwriter or a member of the distributing syndicate.

Friends With Benefits

Institutional investors who demonstrate consistent friendly behavior with IPO participation place themselves in favorable positions for future highly-coveted IPOs. By showing that they are committed to owning shares for the long term, they will likely receive better allocations than flippers for a hot issue. In fact, flippers may get zeroed out entirely on an underwriter's book. As a company matures in the public markets, friendly hands may even be consulted by the company about corporate governance matters or key strategic issues.

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