Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Eating Stock

What it is:

Eating stock occurs when a broker/dealer or market maker has to purchase stock because there are not enough buyers.

How it works (Example):

Let's say Company XYZ is an investment bank that is underwriting the initial public offering of ABC Company. ABC Company wants to sell 10 million shares of common stock. Part of Company XYZ's job is to drum up interest in the stock and get enough institutions and other buyers to commit to making a purchase (called subscribing). If Company XYZ only gets subscriptions for, say, 8 million shares, it may have to eat the stock if its contract with ABC Company requires it to do so.

Why it Matters:

Companies that are going public may require their underwriters to eat stock to ensure that they raise a minimum amount of capital from an offering. Note that eating stock doesn't necessarily mean the underwriter takes a loss on the deal; it is earning an underwriting fee for doing the IPO, and that may far exceed the cost of buying leftover shares.