Penalty Bid

Our hipster brother Rusty is one of those annoying people who always has to be into something before it’s cool (and then promptly loses interest once it becomes “casual”). From obscure underground bands to manbuns to IPOs, if there is something new on the horizon, Rusty is the first to jump right on it. For music and manbuns, this isn’t really a big deal—Rusty can always delete songs from playlists or cut his hair if whatever he’s into becomes too mainstream. But when it comes to IPOs, that isn’t always an option, because penalty bids exist.

“Penalty bids” are provisions attached to the purchase of some IPO stock which say that the purchaser of said stock has to hold onto it for a predetermined amount of time—even if other people start to buy it too, Rusty.

The goal of penalty bids is to keep predatory investors from making short-term IPO profits and then ditching the stock to the detriment of the newly listed company. If Rusty and his broker do decide to sell the shares back early, they’ll face a financial penalty fee. Usually this fee is borne by the broker in the form of reduced commissions, but sometimes it’s passed along to clients.