Penalty Bid

penalty bid

A financial penalty sometimes imposed by the underwriter of a new securities issue against a broker whose customer(s) sold shares of the issue immediately after purchase. Penalty bids are imposed in order to keep the price of a newly issued security from declining.

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Penalty Bid

An offer to buy the security offered in an IPO with the guarantee that the buyer will retain the security for a certain period of time. If the buyer sells the security before the time is over, the underwriter offering the security assesses a penalty on the buyer's broker, who may or may not pass the penalty on to the buyer. Usually the penalty is equal to the broker's commission on the trade. Underwriters accept penalty bids during an IPO to prevent the price of the security from declining through a sell-off.