What it is:
Eating stock occurs when a broker/dealer or market maker has to purchase because there are not enough buyers.
How it works (Example):
Let's say Company XYZ is an investment bank that is underwriting the initial of ABC Company. ABC Company wants to sell 10 million of . Part of Company XYZ's job is to drum up interest in the 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 , it may have to eat the if its contract with ABC Company requires it to do so.
Why it Matters:
Companies that aremay require their underwriters to eat to ensure that they raise a minimum amount of from an . that eating stock doesn't necessarily the takes a loss on the deal; it is earning an fee for doing the , and that may far exceed the cost of buying leftover .