What is Eating Stock?
Eating stock occurs when a broker/dealer or market maker has to purchase because there are not enough buyers.
How Does Eating Stock Work?
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 Does Eating Stock Matter?
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 .