BizTerm Definition
Penalty bid
Full Definition

To discourage individual investors from quickly selling IPOs, some brokerage firms impose a penalty bid on the individual broker if his or her client sells an IPO within a certain period of time. Thus, a broker who would incur a financial penalty if a client wants to quickly sell an IPO has a built-in conflict of interest. Long a little publicized practice, penalty bids are now receiving greater scrutiny by the SEC and some state regulatory agencies. In any case, individual investors should find out ahead of buying an IPO whether the brokerage firm imposes penalty bids. However, if your broker fails to return telephone calls or fails to sell securities as you direct, you should seriously - and immediately consider - changing brokers.

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