What is Eating Stock?

Eating stock occurs when a broker/dealer or market maker has to purchase stock 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 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 Does Eating Stock Matter?

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.