What is a 'Stabilizing Bid'

A stabilizing bid is a purchase of stock by underwriters to stabilize, or support, the secondary market price of a security immediately following an initial public offering (IPO) when the price of the newly issued shares falters or is shaky in trading.

BREAKING DOWN 'Stabilizing Bid'

After a company has made a decision to go public, it will vet a number of underwriters for expertise in valuing the company's equity, marketing and distribution, sell-side research support and trading functions. The trading capability is where the stabilization bid is relevant to the issuer, which will be interested in getting off on the right foot as a public company. When the IPO price is set, and the issuer's shares make their debut in the public, the issuer wants the shares to be well-received, meaning a firm or higher stock price upon release into the market.

The risk of negative perception of the company is high should the trading price fall below the IPO price. To prepare for this risk, the issuer grants the underwriters a greenshoe option, otherwise known as an overallotment option, that allows the underwriters to oversell or short up to 15% more shares than initially offered by the company. If demand does, in fact, begin to look weak and the price wavers out of the gate, the underwriters will step in with a stabilizing bid by buying back the shorted shares. This demand source from the underwriters for the newly-issued shares will help to shore up, or stabilize, the stock price.

Example of a Stabilizing Bid

In mid-2017, Blue Apron Holdings Inc. went public at a price of $10 per share. The underwriters had initially indicated a range of $15-17 per share in the weeks leading up to the IPO, so there was a clear indication that demand would not be as strong as the company had hoped. Blue Apron sold 30 million shares to the underwriters, but with the 15% overallotment, the underwriters sold 34.5 million shares to investors, leaving the underwriters short 4.5 million shares. Although underwriters will not publicly state that they were forced to make stabilizing bids, there was strong evidence that they did so in the case of Blue Apron on the first day of trading because the stock was struggling around the $10 mark. Without the stabilizing bid, the stock may very well have closed below the IPO price that day. That would have been bad optics for the company as well as underwriters. However, stabilizing bids have a finite lifespan. The next day the stock closed at $9.34 and five trading days later it ended at $7.73.

RELATED TERMS
  1. Lead Underwriter

    A lead underwriter is usually an investment bank that organizes ...
  2. Negotiated Underwriting

    In negotiated underwriting, both the purchase price and the offering ...
  3. Underwriting Agreement

    An underwriting agreement is a contract between a group of investment ...
  4. Underwriting Spread

    An underwriting spread is the difference between what underwriters ...
  5. Standby Underwriting

    Standby underwriting is an IPO sales agreement in which the underwriter ...
  6. Competitive Bid

    A competitive bid is a price submitted by a vendor or service ...
Related Articles
  1. Trading

    Greenshoe Options: An IPO's Best Friend

    Find out how companies can boost their initial public offering price with these little-known options.
  2. Insurance

    Is Insurance Underwriting Right For You?

    If you have excellent analytical skills and an eye for detail, this may be your calling.
  3. Insurance

    What is Underwriting?

    Underwriting is a term most often used in investment banking, insurance and commercial banking. Generally, underwriting means receiving a remuneration for the willingness to pay for or incur ...
  4. Investing

    AMC Prices Secondary at $31.50, Shares Fall

    AMC Entertainment priced at secondary offering at 31.50
  5. Insurance

    What Prequalification and Underwriting Do

    Learn now prequalification and underwriting can help you buy the policy that best meets your needs.
  6. Insights

    Energy Fuels Announces $10M Bought Deal Offering (UUUU)

    Energy Fuels will use the proceeds to fund various projects, including shaft sinking and evaluation at its high-grade Canyon mine project in Arizona.
  7. Investing

    Brokerage Functions: Underwriting and Agency Roles

    Learning about underwriting and agency roles at a brokerage can give insight into how securities are issued and traded.
  8. Investing

    Blue Apron Stock Surges on Analyst Recommendations

    Seven out of 12 analysts covering Blue Apron stock gave it a positive rating.
  9. Investing

    Blue Apron: The First (and Last?) Meal-Kit Co. to Go Public

    The meal-kit delivery service business is booming and although Blue Apron took the plunge to public, the rest face potential stiff competition from retail giants.
  10. Investing

    Can Amazon Make a Meal of Blue Apron?

    Amazon is reported to have filed for a patent for meal kit delivery, spooking Blue Apron investors.
RELATED FAQS
  1. Do underwriters make guarantees to sell an entire IPO issue?

    Underwriters do not necessarily make guarantees concerning selling an initial public offering (IPO). Read Answer >>
  2. What does the underwriter do in a new stock offering?

    Learn the role an underwriter plays for an initial public offering, and the steps an underwriter takes in preparing for an ... Read Answer >>
  3. What are the different types of IPO issued?

    Learn about the two ways for a company to go public: fixed price and book building. Under fixed price, the share price is ... Read Answer >>
Hot Definitions
  1. Diversification

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

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

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

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center