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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.