An investor who owns publicly traded stock may be forced to sell his stock. Usually, this is a result of either a margin call or a tender offer as a part of a merger/acquisition. The first is a result of a lack of account equity on the part of the account holder, and the second is the result of a corporate action. These are common occurrences.
What is a Tender Offer?
A "tender offer" is a notice of intent by a company to buy back its shares, or an offer from an acquiring company to purchase shares from shareholders in the target company. Notice is filed according to SEC rules. Shareholders, whether they own shares in an account or in certificate form, are mailed the notice that describes the action and what they may do.
Reasons for Tender Offers
A company may make tender offers for its own shares to gain a larger controlling interest in the firm. In this way, they become less attractive to other firms in the event of a hostile takeover bid. These offers -- by a company for its own shares -- are often made at a higher price than the current share price, and sales of shares back to the company are not mandatory.
If a company's board of directors decides to sell the company to another firm, the old company will typically cease to exist. The new company will have made a tender offer for all outstanding shares, which usually includes a deadline. The offer may be in the form of cash, shares of the new company or a combination of both. All owners of shares in the old company are notified, and the shares are sold or converted. Old shares are usually de-listed from the exchange.
Forced Sales in Margin Calls
When investors use stock shares as collateral to purchase more stock, or buy stock with as little as 50 percent down, they are using margin. In a rising market, the equity grows. However, in a declining market, equity shrinks while the original debit balance -- a loan against the shares -- remains. If equity levels get too low, a "margin call" is made. The investor either has to add cash or more fully pay for securities for the account to bring it up to the required level of equity. If no funds or securities are added, the brokerage firm is required to liquidate securities to meet the call, whether or not the account owner approves.
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