invest Archives | Page 63 of 180

Mar

2024

6 Top Stock Market Forums to Visit

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

Stock market forums provide a place for investors to come together online and share specific financial ideas and insights. The main goal of these stock message boards is to help other participants profit in the markets. Some of the most popular stock forums take the sense of community beyond the forum format, too.

Some are financial blogs or research publications where large numbers of investors engage in discussions in the comments section beneath each article. Others are comprehensive investment communities in addition to discussions on many non-financial topics. And some stock market forums and stock message boards more closely resemble social networking sites than traditional messaging boards.

6 Top Stock Market Message Boards and Forums

Many members of the investment community generally want to help one another profit in the markets — that’s typically the common interest that draws participants together. But as with any online community, there can be heated debates, misinformation, and outright trolling in stock forums. The general rules of online interaction apply: Exercise caution when consuming information or engaging in discussions in such communities.

Here is a list of some popular stock market forums and stock message boards, including some that have investment strategies for beginners. Learn the details on how these forums work.

1. InvestorsHub

InvestorsHub is mostly oriented toward investors trying to make profit by speculating on short-term investments or trades. The stock market discussion tends to revolve around riskier securities.

Day trading of penny stocks (stocks trading at prices below $5 per share) is one of the most popular topics at InvestorsHub. The site also explores markets relating to different cryptocurrencies, FOREX, commodities, and stocks. Investors have access to tools for creating model portfolios, charting, newsletters, stock scanners and more, for free.

2. Stockaholics

Stockaholics is a financial forum and active online community that has discussions about investing, stock tips, penny stocks, and market analysis. The community is filled with many traders and investors, and it’s a place where like-minded individuals can connect to talk about the market.

On the moderated boards at Stockaholics, investors can share information, resources, and ideas. There are educational videos for new investors and also forums where they can ask questions.

Investors can also get real time market updates on the site, see streaming live charts, and read the latest financial news.

3. SeekingAlpha

SeekingAlpha (or SA for short) is a website where almost anyone can become a contributor, although only high-quality financial content usually makes the cut and gets published. The term “alpha” refers to a higher rate of return than average, so the name of the site could be translated as “investors seeking returns.”

The SA platform publishes the work of many top-notch investment advisors, money managers, and investment newsletter writers. The comments section underneath each article is where the site takes on the role of a stock market forum.

Most new investors can learn a lot from simply reading articles and comments for free on SeekingAlpha. Those who want to participate could sign up and start asking questions in the comments. More experienced investors could even try their hand at publishing their own articles on the site, then engaging with readers who comment on their articles.

4. Motley Fool Community

The Motley Fool is a high-profile site with millions of users that covers many financial topics that may be helpful to those building an investment portfolio. Their investment forum is called the “Motley Fool Community,” which houses free discussion boards. There are boards for financial planning, learning to invest, real money stock picks, retirement planning, and stocks A to Z, among others.

The Motley Fool Community is focused on investment discussions, of course, but in addition to the typical financial topics, there are boards for things like food and drink, fun and games, religion and culture.

5. StockTwits

StockTwits was designed to be like Twitter for finance folks. The platform has more than eight million registered users, and the company is registered with the Securities Investor Protection Corporation (SIPC) and the Financial Industry Regulatory Authority (FINRA).

Users can create posts with links, charts, and specialist opinions on stocks in much the same way they can on other social media networks. When a forum member posts about a specific company or stock, he or she can mark the post with a “cashtag” so others can find it.

StockTwits also allows members to create watchlists for the stocks they want to keep an eye on.

6. Investors Hangout

Investors Hangout has free stock message boards, stock charts and quotes, and news updates. Investors can see the most active stocks of the day and view live charts. There are blog posts on investing, the markets, real estate, business, and personal finance.

Investors can ask questions of and get suggestions from other members. There are also boards on global markets.

💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

Pros and Cons of Relying on Stock Forums for Information

Whether you’re looking for information on investing for beginners or tools for more experienced investors, stock forums can have some potential benefits, but they also may have serious drawbacks you should be aware of.

Pros

Some advantages of a stock forum may include:

Connecting with other investors.
Stock market forums and stock message boards can be a way to share ideas, opinions, and information with other investors. An individual might get diverse perspectives and potentially helpful insights, for instance.

Access to educational information and special tools.
A number of forums have valuable tools that individuals can access. This might include stock trackers, charts, and even real-time data.

Getting market analysis.
Some forums may have market analysis investors can look at for free.

Cons

When visiting a stock market forum, be sure to proceed with caution and watch out for:

Information that isn’t right for your situation.
Investment advice is not one-size-fits-all. Something recommended on a forum, even by a legitimate financial specialist, may not be right for your particular circumstances or financial goals.

Misinformation.
Some of the information may be wrong, misleading, or fraudulent.

Unverified sources.
Individuals might talk up their qualifications or financial savvy in a forum, but it’s possible that some could misrepresent themselves online. They might also have conflicts of interest that they fail to disclose, such as potential gain from promoting a certain financial or investment product.

Potential to get caught up in the hype.
Some investment strategies touted by some forums may be risky or complicated. Make sure you thoroughly understand these strategies and that you’re comfortable with the potential risks before you decide to try them. And don’t allow yourself to get swept up in hype about possible “big gains,” which could cause you to make a rash decision you might later regret. It’s best to separate your emotions from your finances.

💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good choices shouldn’t stem from strong emotions, but a solid investment strategy.

Always Do Your Own Research Before Investing

While you may find it worthwhile and even educational or enlightening to visit a stock forum or stock message board, don’t just take the information at face value. Instead, always investigate and research it thoroughly to make sure it is accurate and legitimate.

In addition, carefully evaluate whether a strategy makes sense for your financial situation, investment goals, and risk tolerance. Weigh the pros and cons and don’t make rash decisions. And finally, remember that there is no sure thing when it comes to investing. At the end of the day, you want to make sure your financial security is safe.

The Takeaway

Stock market forums are online spaces that allow investors and traders to discuss the financial markets, among other things. There are many out there, some more popular than others, and each is different in its own unique ways. Different stock market forums suit the needs of different types of investors, So, before choosing a forum, a potential user might want to consider what their investment goals are.

It’s always important to remember, too, that investors should be critical and skeptical of any tips or advice that they receive, and to do their own research and homework before making investing decisions. There’s a lot of noise on the internet, and it can be difficult to parse out what’s genuine.

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For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What are the advantages of reading a stock market forum?

Stock market forums can be a way for investors to connect with other investors to share ideas, opinions, and information. They might also get access to information from financial professionals, as well as tools like stock trackers, charts, and various data points.

What should I be wary of?

In stock market forums, it’s best to be wary of any tips and advice you may receive, and to always do your own careful research before making investing decisions. Also, be aware that sources could misrepresent themselves online, or they may have a stake or interest in a certain product. And finally, be wary of getting caught up in the hype about an investment and rushing into a decision you could later regret.

What is the most popular stock market forum?

One of the most popular stock market forums is the Motley Fool Community, which has millions of members. The site offers free news and commentary about the stock market, financial planning, investments, and retirement saving, among other topics.

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Mar

2024

Price-to-Earnings (P/E) Ratio, Explained

By Michael Flannelly | Growing Wealth, invest, Investing, Terminology | Comments Off

What is a good price to earnings ratio? An exploration into the popular stock analysis tool.

Mar

2024

Understanding Market Sentiment

By Amanda Holden | Growing Wealth, invest, Investing, Terminology | Comments Off

Market sentiment concerns a complicated blend of thoughts, feelings, and actions, all of which have an effect on stock prices and markets. Flip on the cable news and the vibe might have you believe that political statements, economic data points, natural disasters, or global unrest have some sort of predictable or unilateral effect on investing behavior.

And they might! But in a slightly more roundabout way. These events may well change how investors feel about owning certain investments, which leads them to buy or sell those investments. And it is the forces of supply and demand that push asset prices higher or lower. Said another way, investor sentiment, also known as market sentiment, can cause price volatility.

Market Sentiment Defined

The collection of all investor feelings — and actions — amounts to what is called market sentiment. It is a powerful force in the markets and is the subject of much study (and cable news discourse).

Market sentiment is affected by millions of factors daily. That’s because there are at least as many participants in popular marketplaces, like the stock market.

While one investor may be selling stocks because of poor corporate earnings, others might simply sell because they woke up on the wrong side of the bed. It is overly simplified to assume only one cause of changes to asset prices.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Collective Mood Swings

Market sentiment is the phrase used to describe the overall spirit of investors in a market. (The stock market was used in the example above, but market sentiment exists in all investment markets.) Think of market sentiment as a giant mood ring for a particular market at a particular time.

The collective psychology of the market has the power to move stock prices. (How much “we” demand something gives it its value.)

When prices go up, the overall tone of the market is said to be positive, or bullish. When prices move downward, it generally means that investor sentiment is negative, or bearish. Investor attitudes about investments are realized in the price of those investments.

And anyone who watches the market knows that investors can be quite emotional at times. It’s human nature. It’s best that investors accept this reality.

In fact, investors should find it freeing that humans aren’t always rational and that sometimes asset prices can have major swings along with global moods. It is not up to the investor to control the swings of the stock market, but instead to weather them calmly.

While company earnings are the engine that drives stock market returns over time, it is the act of buying and selling that, in the shorter term, can cause the stock market to wiggle.

The stock market is of particular interest when looking at market sentiment. It’s a popular, global market, for one. Second, volatility can be dramatic, unlike markets for bonds. Third, it is easy to witness changes happening in real time.

The stock marketplace is like few marketplaces in the world, where prices are updated constantly in direct relation to the buying and selling of items in question. (Imagine how wild that would be if it happened at a grocery store.)

Market sentiment is considered an important tool for market analysis. It is used to make decisions about the very market the sentiment applies to.

Market Sentiment as an Indicator

When analyzing markets in an effort to predict them, indicators are used. An indicator is a sign or trigger that may hold some sort of valuable information. Market sentiment is one such indicator.

Compare market sentiment as an indicator with fundamental analysis, which largely relates to business performance, projected business performance, and the prevailing conditions for business performance.

Imagine a new tax law that’s expected to have a strong impact on the profitability of businesses in a certain industry. This would be considered a fundamental indicator.

Sometimes sentiment indicators and fundamental indicators can be at odds with each other. Fundamental indicators appear to point in one direction, but investor emotion may say otherwise.

For example, a business could have poor business fundamentals, and investors may still feel exuberant about that company and pile into its stock, which pushes the price of that stock higher.

Examples of Market Sentiment as an Indicator

There are many ways in which market sentiment is used as a market indicator. Then there are even more interpretations for what that data could mean.

It’s important to realize that no market indicators should be taken alone as fact. Why? Market indicators are in the business of predicting the future, which, in the stock market and otherwise, is a difficult thing to do.

In forecasting the general trajectory of the stock market, investor sentiment is sometimes used as a contrary indicator.

As the old adage goes, “Be fearful when others are greedy and greedy when others are fearful.” In a broad sense, when market sentiment is poor, it could indicate that it’s a good time to invest. When market sentiment is hot, it could be a bad time to invest.

When do people feel the worst about investing? At market bottoms, when prices are low. When do investors feel best? After the market has done well, which could indicate that prices are too high.

This is a characteristic of market bubbles, where investor mania causes prices to soar beyond their fundamental value. (Exhibit A was the dot com bubble, which saw investors piling into internet stocks, some of which never had so much as a quarter of positive earnings.)

Another instance in which sentiment might be used to assess an investment is through a strategy called value investing. With this method, investors attempt to uncover underpriced stocks — stocks whose price is lower than the believed value.

This could mean looking for a stock that has a strong fundamental foundation but that has yet to catch fire with investors, or a stock that is being punished (perhaps unnecessarily) by investors. Finding the proverbial diamond in the rough requires both an understanding of a company’s fundamentals and the market sentiment surrounding it.

Day trading, which is the practice of making bets on the price movement of a security during the trading day, relies on what are called technical indicators. And because of the power of investor attitudes to move prices, factors of sentiment can play an important role in short-term market changes.

For example, technical traders may look at a security’s historical price movement, called moving averages, in an attempt to surmise what will happen going forward. It is common to look at both 50-day and 200-day simple moving averages in an attempt to predict what happens next.

Other examples of sentiment indices are the High-Low Index, the CBOE Volatility Index, also known as the “fear” index, and the Bullish Percent Index.

The BPI measures the number of stocks with bullish and bearish patterns according to point and figure charts, ultimately producing a read on the sentiment of the overall market. An output of 50% is neutral, while reads above 80% are bullish and below 20%, bearish.

Some investors might argue that the above technical indicators have a serious limitation: They are using data from the past to project into the future and that the future is more or less unknown.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Building an Investment Strategy

Market sentiment concerns the overall thoughts, feelings, and actions of market participants, and has an effect on what happens in the stock market. Negative sentiment can drive stock values down, while positive sentiment can lead to market euphoria and higher values.

It can be difficult to keep up with market sentiment, or to even read it accurately. But knowing what sentiment is, and how it can affect the markets, can be important when making investment decisions.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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Mar

2024

Black Swan Events and Investing, Explained

By Melanie Mannarino | Growing Wealth, invest, Investing | Comments Off

The term “black swan event” is widely used in finance today to describe an unanticipated event that severely impacts the financial markets.

The name stems from the discovery of avian black swans by Dutch explorer De Vlamingh while exploring Australia in the late 1600s. Historians credit de Vlamingh with separating the “expected” (i.e., a white swan, which were plentiful) with the “unexpected” (i.e., a black swan, which was a rare sighting).

Writer, professor and former Wall Street trader Nassim Nicholas Taleb popularized the financial theory of “black swan” events in his 2007 book The Black Swan: The Impact of the Highly Improbable.

“A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences,” Taleb wrote in his book. “Black swan events are characterized by their extreme rarity, their severe impact, and the widespread insistence they were obvious in hindsight.”

Taleb described the occasional — but highly problematic — arrival of black swans on the investment landscape, and outlined what, in his opinion, economists and investors could do to better understand those events and protect assets when they occur.

What Is a Black Swan Event?

According to Taleb, a black swan event is identifiable due to its extreme rarity and to its catastrophic potential damage to life and health, and to economies and markets. Taleb also notes in the book that once a black swan landed and devastated everything in its path, it was obvious in hindsight to recognize the event occurred.

It can be a difficult concept for investors. Who, after all, throughout the history of the stock market, would leave their finances unprotected from a black swan onslaught if they knew the event was imminent? By definition, predicting the arrival of a black swan is largely outside the realm of probability. All anyone needs to know, Taleb maintains, is that black swans occur and investors should not be surprised when they do happen.

Taleb outlines three indicators that signal the arrival of a black swan event. Each is meaningful in truly understanding a black swan scenario.

1. Black swan events are outliers. No similar and prior event could predict the arrival of a particular black swan.

2. Black swan events are severe, and they inflict widespread damage. That damage also has a severe impact on economies, cultures, institutions, and on families and communities.

3. They’re usually seen in the rear view mirror. When black swans occur and eventually dissipate, recriminations take its place. While the specific black swan event wasn’t predicted, observers say the event could have and should have been prevented.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Black Swan Event Examples

It’s become common for politicians and investors to call any negative event a “black swan” event, whether or not it meets Tasam’s definition. However, history has no shortage of true black swan events, which led to large, unpredictable market corrections.

The following events are considered some of the most infamous among economists and historians.

The Soviet Union’s Historic Collapse

Economists consider the collapse of the Soviet Union in 1991 a major black swan. Only 10 years earlier, the Russian empire was considered a major global economic and military threat. A decade later, the Soviet Union was no more, significantly shifting the global geopolitical and economic stage.

The 9/11 Terrorist Attacks

In hindsight, the United States might have seen the attacks on the World Trade Center in New York and the Pentagon in Washington, D.C. coming. International terrorism had long been a big risk management issue for the U.S. government, but the severity of the attack left the world stunned – and plunged the U.S. into a serious economic decline. Stocks lost $1.4 trillion in value the week after the attacks.

The Dot-com Bubble

In the late 1990s, investors were indulging in irrational exuberance and nowhere was that more clear than with the nation’s stock market — particularly with white-hot technology stocks. With an army of Internet stocks in the IPO pipeline, overvalued tech stocks plummeted, taking the entire stock market down in the process. The damage was staggering, with the Nasdaq Index losing 78% of its value between March 2000 and October 2002.

The 2008-2009 Financial Crisis

After a series of high-risk derivative bets by major banks, mounting losses in the U.S. mortgage market, and the collapse of Lehman Brothers, the U.S. economy teetered on the edge of disaster — a scenario it would take almost a decade to correct. The unemployment rate doubled to more than 10%, domestic product declined 4.3%, and at its worst point, the S&P 500 plummeted 57%, creating a bear market.

It’s worth noting that although some people have referred to the Covid-19 pandemic as a black swan event, Taleb does not consider it to be one since he feels there was enough historical precedence to foresee it.

Why Do Black Swan Events Happen?

Since black swan events are virtually impossible to predict, there is no concrete answer as to why they happen. The world is complicated, with many different factors — political, financial, environmental, and social, among others — impacting one another and setting off chains of events that could potentially become black swan events in scope and magnitude.

💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

Can You Predict a Black Swan Event?

By its very definition, it’s nearly impossible to predict a specific black swan event. This makes it hard to prepare for black swans as you would for other investment risks.

Instead, investors may want to focus on making sure they’re prepared, generally, for the unknown. Here’s how to help do that:

• Be pragmatic. Investors are better off knowing unanticipated negative events do exist and could arrive on their doorstep at any time. Keep in mind the possibility of black swans and consider building an expectation of stock volatility into your overall portfolio-management strategy.

• Don’t get bogged down by long-term forecasts. Don’t rely solely on expert predictions or far-off investment outlooks, since unexpected events, including black swans can happen at any time and it’s normal for markets to fluctuate. Instead, consider building a more conservative element into your investment portfolio, one that relies more on protecting your assets, so you’re not tempted to make rash moves during a black swan event. Have a candid conversation with your financial advisor, or educate yourself if you don’t have a financial advisor, about how proper diversification may help build a portfolio that balances the need for performance with the need for protection.

• Don’t panic when a black swan event happens. As tempting as it might be to try to get out of a market during a black swan event and get back in when it fades away, resist the urge to engage in market timing.

• Look for opportunities. Putting money into the markets during a black swan event can be difficult and potentially risky, but investing in a down market may yield positive returns over the long-term.

Rather than trying to time the market, consider using a dollar-cost averaging strategy, in which you make regular purchases — even during a black swan event.

The Takeaway

For long-term investors, the prudent stance on black swan events is to acknowledge their existence, build some protection into your investment portfolio to help mitigate potential damage, and be ready to take full advantage of a market upturn once the black swan flies away.

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FAQ

What is a black swan event in recent years?

One of the most recent black swan events was the 2008-2009 financial crisis known as the Great Recession. That’s when a series of high-risk derivative bets by major banks, mounting losses in the U.S. mortgage market, and the collapse of Lehman Brothers, the biggest U.S. bankruptcy ever, pushed the U.S. economy to the edge of disaster.

What was the biggest black swan event?

The Great Depression of 1929 was probably the most infamous black swan event. It started with the U.S. stock market crash in October 1929 and led to a worldwide drop in stock prices. The U.S. economy shrank by 36% between 1929 and 1933, many banks failed, and the U.S. unemployment rate skyrocketed to more than 25%. It was the longest and most severe economic recession in modern history.

What are the attributes that identify a black swan event?

According to Nassim Nicholas Taleb, who popularized the black swan theory, the attributes that identify a black swan event are: 1) black swan events are rare and no similar or prior event could predict them, 2) black swan events are severe and inflict widespread damage, and 3) after the fact, observers say the black swan event could have and should have been prevented.

Photo credit: iStock/by Martin Nancekievill

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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Mar

2024

What is the Greenshoe Option? Definition & How it Works

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

The greenshoe option allows underwriters involved with IPOs to sell more shares than initially agreed upon: usually up to 15% more. That can occur if there is enough investor demand to purchase the shares.

Because IPO share prices can be volatile, the greenshoe option is an important tool that can help underwriters stabilize the price of a newly listed stock to protect both the company and investors.

Understanding the Greenshoe Option

Also called the over-allotment option, the greenshoe provision is part of an underwriting agreement between an underwriter and a company issuing stock as part of an IPO, or initial public offering. The greenshoe option is the only type of price stabilization allowed by the Securities and Exchange Commission (SEC).

The SEC allows this because it increases competitiveness and efficiency of IPO fundraising. It gives underwriters the ability to stabilize security prices by increasing the available supply. It is the responsibility of an underwriter to help sell shares, build a market for a new stock, and use the tools at their disposal to launch a successful initial public offering.

The greenshoe option got its name when the Green Shoe Manufacturing Company was issued the first over-allotment options in 1919.

💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.

How Does a Greenshoe Option Work?

During the IPO process, stock issuers set limits on how many shares they will sell to investors during an IPO. With a greenshoe option, the IPO underwriter can sell up to 15% more shares than the set amount.

IPO underwriters want to sell as many shares as they can because they earn on commission as a percentage of IPO sales.

All of the details about an IPO sale and underwriter abilities appear in the prospectus filed by the issuing company before the sale. Not every company allows their investment banker to use the greenshoe option. For instance, if they only want to raise a specific amount of capital, they wouldn’t want to sell any more shares than necessary to raise that money.

There are two ways an underwriter can over allot sales:

At the IPO Price

If the IPO they are underwriting is doing well, investors are buying IPO shares and the price is going up, the underwriter can use the greenshoe option to purchase up to 15% more stock from the issuing company at the IPO price and sell that stock to investors at the higher market price for a profit.

A Break Issue

Conversely, if an IPO isn’t doing well, the underwriter can take a short position on up to 15% of the issued stock and buy back shares from the market to stabilize the price and cover their position.

The underwriter then returns those additional shares to the issuing company. This is known as a “break issue.” When an IPO isn’t performing well, this can reduce consumer confidence in the stock, and result in investors either selling their shares or refraining from buying them.

The greenshoe option helps the underwriter stabilize the stock price and reduce stock volatility.

Types of Greenshoe Options

There are three types of greenshoe options an underwriter might choose to use depending on what happens after an IPO launches. These options are:

Full Greenshoe

If the underwriter can’t buy back any shares before the stock price increases, this is known as a full greenshoe. In this case, the underwriter buys shares at the current offering price.

Partial Greenshoe

In a partial greenshoe scenario, the underwriter only buys back some of the stock inventory they started with in order to increase the share price.

Reverse Greenshoe

The third option for underwriters is to purchase shares from market investors and sell them back to the stock issuer if the share price has dipped below the original offering price. This is similar to a put option in stock trading.

Recommended: How Are IPO Prices Set?

Greenshoe Option Examples

Here’s an example of how a greenshoe option might work in real life.

Once the IPO company owners, underwriter, and clients determine the offering or initial price of the newly issued shares, they’re ready to be traded on the public market. Ideally, the share price will rise above offering, but if the shares fall below the offering price the underwriter can exercise the greenshoe option (assuming the company had approved it in the prospectus).

To control the price, the underwrite can short up to 15% more shares than were part of the original IPO offering.

Let’s say a company’s initial public offering is going to be 10 million shares. The underwriters can sell up to 15% over that amount, or 1.5 million more shares, thus giving underwriters the ability to increase or decrease the supply as needed — adding to liquidity and helping to control price stability.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

What the Greenshoe Option Means for IPO Investors

The greenshoe option is an important tool for underwriters that can help with the success of an IPO and bring additional funds to the issuing company. It reduces risk for the issuing company as well as investors. It can maintain IPO investor confidence in a newly issued stock which helps to build a long-term group of shareholders.

Although buying IPO stocks can be very profitable, stock prices don’t always increase and sometimes they can be volatile. It’s important for investors to research a company, look at the IPO prospectus, understand what the stock lock-up period and greenshoe options are before deciding to buy.

The Takeaway

Buying shares in IPOs can be a great way to invest in companies right when they go public. Although IPO investing comes with some risks, and IPO stock can be volatile, investment banks and companies going public use tools such as the greenshoe option to minimize volatility.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Photo credit: iStock/AzmanJaka

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN1023181

6 Top Stock Market Forums to Visit

6 Top Stock Market Message Boards and Forums

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4. Motley Fool Community

5. StockTwits

6. Investors Hangout

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Pros and Cons of Relying on Stock Forums for Information

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Market Sentiment Defined

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Collective Mood Swings

Market Sentiment as an Indicator

Examples of Market Sentiment as an Indicator

Building an Investment Strategy

Black Swan Events and Investing, Explained

What Is a Black Swan Event?

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Black Swan Event Examples

The Soviet Union’s Historic Collapse

The 9/11 Terrorist Attacks

The Dot-com Bubble

The 2008-2009 Financial Crisis

Why Do Black Swan Events Happen?

Can You Predict a Black Swan Event?

The Takeaway

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What is the Greenshoe Option? Definition & How it Works

Understanding the Greenshoe Option

How Does a Greenshoe Option Work?

At the IPO Price

A Break Issue

Types of Greenshoe Options

Full Greenshoe

Partial Greenshoe

Reverse Greenshoe

Greenshoe Option Examples

What the Greenshoe Option Means for IPO Investors

The Takeaway

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