What is 'Laddering'

Laddering is the promotion of inflated pre-IPO prices for the sake of obtaining a greater allotment of the offering. Laddering is an illegal IPO practice in which the underwriter engages in the sale of IPO shares to clients with the implicit agreement that more shares will be purchased post IPO, leading to big gains for both parties. Once the price increases a certain level, "insiders" then sell their shares and take their profits.

BREAKING DOWN 'Laddering'

An underwriter will push up the issue price of an IPO through promotion, in order to please the issuer and secure a larger allotment. By agreeing to allocate additional shares to choice clients, the underwriter and clients can make big gains on the IPO shares, while the firm offering shares in the IPO are happy with the underwriter for creating increased market value.

Legal Laddering

Laddering is also the name of an investment technique that involves purchasing multiple financial products with different maturity dates. 

Laddering can be used to free up capital. For example, a person may purchase a shorter term bond in the event that he needs the capital soon to fund his children's tuition. A person might purchase longer term bonds as a retirement investment, with a more favorable rate, assuming the economy is experiencing a normal yield curve during this time.

Laddering can also be the basis for an overall retirement planning approach for all retirement investments. The basic point of the concept is to seperate CDs, cash, bonds, annuities, and others into different "ladders" or "buckets" or "baskets," depending on when the asset is expected to be liquidated to fund the retirement revenue stream. Low-risk assets are used at the start of retirement (and usually have an expected lower rate of return, due to lacking a risk premium). Higher-risk assets would be placed in a basket used at the end of retirement.

Laddering can help an investor create a well-diversified portfolio and achieve a variety goals. For instance, it can decrease interest rate risk by holding both short-term and long-term bonds. If rates are rising, as one bond matures the funds can be re-invested into higher yield bonds. The practice of laddering can also help an investor manage re-investment risk because as one bond in the ladder matures, the cash is re-invested, but it only represents a portion of the total portfolio. Even if prevailing rates at the time of re-investment are lower than the previous bond was returning, the smaller amount of reinvestment dollars mitigates the risk of investing a lot of cash at a low return. Laddering can also help maintain steady cash flows to encourage regular saving for investors looking for an income-producing portfolio.

RELATED TERMS
  1. Corporate Ladder

    The rise through a company's hierarchy to further advance one's ...
  2. Bond Ladder

    A bond ladder is a portfolio of fixed-income securities in which ...
  3. Reinvestment Risk

    Reinvestment risk is the probability that an investor will be ...
  4. Formula Investing

    Formula investing is a method of investing that rigidly follows ...
  5. Chain Ladder Method (CLM)

    The Chain Ladder Method (CLM) calculates the claims reserve requirement ...
  6. Fixed Income

    Fixed income is a type of investment in which real return rates ...
Related Articles
  1. Investing

    Build a Bond Ladder to Boost Returns

    If you want a diversified portfolio and steady cash flow, check out the fixed-income strategy known as laddering. Learn how to create a bond ladder.
  2. Retirement

    Five Sources of Income for Your Retirement

    Generating income without going to work can be a murky concept. Find out how it works.
  3. Managing Wealth

    What Is A CD Ladder?

    Find out how a CD ladder can protect you from interest rate risk.
  4. Retirement

    Bond Ladders: A Bad Idea for Retirees?

    Using a ladder approach may sound smart, but purchasing individual bonds usually means higher costs and less flexibility than buying bond funds.
  5. Investing

    Five Key Bond Moves to Profit from Rising Yields

    Here are five key moves to consider for structuring portfolios to profit from rising yields.
  6. Investing

    Strategies for Clients in Rising Rates Environment

    Any time there are rising rates it creates risks for investors. Fortunately, there are severa strategies that can help investors protect their portfolios.
  7. Investing

    How to Prepare for Rising Interest Rates

    Get to know the basic, time-tested strategies that any investor or trader can use to prepare and profit in a rising interest rate environment.
  8. Retirement

    Guaranteed Retirement Income in Any Market

    By laddering annuities, you can be sure you'll have income no matter what the market does.
  9. Investing

    3 Best Bond Strategies in a Rising-Rate Environment

    Find out which bond strategies offer the best protection and investment return during the Federal Reserve's monetary tightening cycle.
  10. Investing

    How to Create a Modern Fixed-Income Portfolio

    Exposure to different asset classes is required to generate income, reduce risk and beat inflation. Find out how bonds can help.
Hot Definitions
  1. Risk Tolerance

    Risk tolerance is the degree of variability in investment returns that an individual is willing to withstand.
  2. Initial Coin Offering (ICO)

    An Initial Coin Offering (ICO) is an unregulated means by which funds are raised for a new cryptocurrency venture.
  3. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  4. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  5. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center