DEFINITION of Undigested Securities

Undigested securities are newly issued stocks, bonds or other securities that remain undistributed due to insufficient investor interest or public demand at the offering price. Sometimes the phrase also refers to older securities that are no longer marketable, due to their toxic nature.

BREAKING DOWN Undigested Securities

When a corporation issues stocks, bonds or other instruments, an underwriting group agrees to sell the issue (hopefully, for a profit) on the financial exchanges. Undigested securities are the portion of the issue that do not sell at their initial public offering (IPO), even though they are available for purchase by investors. Depending on its agreement with the issuer, the underwriting syndicate may be required to buy undigested securities itself.

Just because a security is undigested doesn't mean it is low quality. The issue could be unappealing to investors for a number of different reasons. There could be negative press surrounding the issue, current economic conditions could be dampening interest in new securities issues, an array of other financial information could be flooding the investment community to the point where there has not been time to analyze new issues, and so on. As a 1906 article in The Commercial & Financial Chronicle, a weekly paper, put it: "Obviously all securities which have not found ultimate lodgment in the hands of investors must be regarded in as sense as 'undigested,' whatever their character. But there is manifestly a deal of difference between an undigested security of a new, untried venture, or one whose standing has not yet been definitely determined, and a security of undoubted merit."

Who Coined the Term Undigested Securities?

Recorded use of the phrase "undigested securities" dates back to the early 20th century and may have originated with the financier J.P. Morgan. An article in the financial newspaper The Commercial West, dated April 18, 1903, attributes it to him, in reference to the depressed nature of the contemporary stock market (which was still reeling from the Panic of 1901 at the time). A 1914 article in The North American Review  "The Problem of Undigested Securities," noted, "It is not a new thing that the security-market should find itself overloaded with new issues and that prices should break violently when it was discovered that the amount offered to the public was greater than the appetite for its absorption. It was this condition which caused such a sudden collapse of the stock-market in 1903, and which was condensed by the late Mr. J.P. Morgan into the pithy phrase, 'undigested securities.' "