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Most people who live and work in the U.S. need to file an annual tax return. Depending on your financial situation, your tax return may be simple or complex. If your tax return or financial situation is complicated, with many forms of income, deductions, or credits, you may end up making mistakes on your tax return. Even with a simple return, it’s possible that you might make a mistake that could cause the Internal Revenue Service (IRS) to impose fees, interest, or additional payments.

What follows are 15 of the most common tax filing mistakes — and how to avoid making them.

How Common Are Mistakes on Tax Returns?

The IRS does not release detailed statistics about how common mistakes on tax returns are, but they do say that mistakes are much more common when filing paper returns. The agency suggests that taxpayers use software to prepare their returns or work with a reputable tax preparer. This can help eliminate some of the common mistakes that occur with tax returns.

Does the IRS Care About Small Mistakes?

Yes, the IRS definitely cares about small mistakes on tax returns, though the penalties may not be as large as they are for substantial mistakes. The IRS potentially levies two different kinds of accuracy-related penalties:

•   Negligence or disregard of the rules or regulations penalty

•   Substantial understatement of income tax penalty

In cases of negligence or disregard of the rules or regulations, the penalty is 20% of the amount that was underpaid due to negligence or disregard. For a substantial understatement, the penalty is 20% of the amount that was underpaid due to the understatement on the return.

These potential penalties are on top of still having to pay the tax that you owe.

Recommended: How to File Taxes for Beginners

16 Common Tax Mistakes

Here are a few of the most common tax mistakes.

1. Not Filing Your Taxes on Time

Each year, the IRS sets the deadline for filing your federal income tax return. This date is usually April 15, though it can be extended sometimes if April 15 falls on a weekend or holiday. Not postmarking or e-filing your return by the tax filing deadline can lead to a penalty.

2. Not Putting in the Right Social Security Number

The IRS uses Social Security numbers to match up information it receives from you with information it receives about you from your employer, bank, and other entities. Messing up even a single digit in your Social Security number will disrupt this process and could cause the IRS to reject your return.

Be sure to enter your Social Security number exactly as it is shown on your Social Security card. Do the same with your spouse and anyone else listed on your tax return.

Recommended: Guide to Understanding Your Taxes

3. Not Filing Your Taxes at All

Generally, most people who work in the U.S. and have income over the filing threshold are required to file an annual income tax return. The penalty for not filing is 5% of the unpaid taxes for each month that a tax return is late, not to exceed 25% of your unpaid taxes.

4. Filing Too Early

While you don’t want to file your taxes too late (after the deadline), you also don’t want to file them too early. You want to make sure that you have received all the W-2, 1099, and other tax forms that are due to you. If you get additional forms after you’ve already filed your taxes, you may need to file an amended return.

5. Inputting the Wrong Bank Information

The IRS encourages people to e-file and choose to have their refund sent via direct deposit. But if you put in the wrong bank routing and account information when filing your tax return, you may delay your refund.

6. Incorrect Information

It’s not only your bank account and routing information that needs to be correct — you need to make sure that all of your other numbers and details are correct. This includes any information from your W-2 or 1099 forms you manually input into your tax return. Using software or a reputable tax preparer can help to minimize the chances you enter incorrect information.

7. Missing Information

If you have more than one bank account and/or a number of investment accounts, you may forget to report income (or losses) from one, or more, of these financial accounts. This is an immediate red flag to the IRS. Keeping track of all your financial paperwork throughout the year can help avoid this problem.

8. Forgetting to Sign the Forms

The IRS says that your return is not valid unless it is signed. If you file a paper return, you (and your spouse, if you’re filing a joint return) must sign the return. E-filed returns can be signed electronically by selecting an electronic PIN.

Recommended: The Fastest Ways to Get Your Tax Refund

9. Forgetting Important Paperwork

If you are working with a tax preparer, make sure to bring, or electronically send, all of your tax-related paperwork. This includes all income statements (such as W-2s and 1099s) and all tax deduction documents (such as Form 1098 for mortgage interest and Form 1098-T for college tuition paid). This will help prevent errors stemming from missing information.

10. Not Taking Advantage of Tax Breaks

You are legally allowed but not required to take any tax deductions or tax credits that you are eligible for. The IRS generally does not care if you pay more tax than necessary. But not taking advantage of tax breaks you’re eligible for can cost you money.

11. Writing the Check to the Wrong Entity

If you owe money to Uncle Sam, be sure to make the check out to the U.S. Treasury. If the check isn’t filled out correctly, the IRS likely won’t cash it. This can result in a late payment — and a penalty. Keep in mind that you can also pay any owed taxes online via IRS Direct Pay or use the electronic payment options in your tax software.

12. Math Errors

The IRS says that math errors are among the most common tax filing mistakes. This is especially true when filling out your tax return on paper, since tax software will generally do all the math for you.

13. Not Claiming All Streams of Your Income

Even if you are paid in cash or don’t receive a W-2 or 1099 form, you are legally required to report all income received in a tax year. Not claiming an income stream, even if it was part-time or “gig work,” may open you up to additional taxes, interest, and/or penalties.

14. Filing Your Taxes Under the Wrong Status

There are requirements that come with the different filing statuses that are available to you, and filing under the wrong status is a common tax filing mistake. For example, you can’t use the “head of household” status just because you make the most money in your family — this tax filing status is only for unmarried people who have to support others. If you’re married, you have a choice of two different types of filing status, and one will likely be more advantageous to you than the other.

15. Not Getting Help When You Need It

If you have a relatively simple tax return, you may feel comfortable filing your tax return on your own. But as your taxes get more complicated, it may make sense to work with a reputable tax professional. Not getting help when you need it may end up costing you a significant amount of money.

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16. Name/Misspelling Errors

Our final tax filing mistake that is common is, yes, name spelling errors. Make sure that you are checking and double checking all of the names entered into your tax return. Misspelling a name may cause the processing of your return to be delayed.

Tips on Avoiding Tax Mistakes

If you’re looking to avoid tax mistakes, here are a few things to keep in mind:

•   Consider using tax software that can do the math for you and automatically select the right forms for your situation.

•   If your financial situation becomes even more complicated, consider working with a tax professional.

•   Include all the information and tax documents you’ve received from all sources.

•   Make sure to wait to file until you’ve received all your documents, but early enough that you don’t go past the April filing deadline.

The Takeaway

In life, mistakes happen. However, you generally want to avoid them when you’re filling your tax return. Even a small misstep could hold up your return, delay any refund, and lead to interest and penalties. It’s wise to take time to understand your taxes or rely on a tax professional for help. Getting it right the first time around can help you save time — and money.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Does the IRS penalize you for tax filing mistakes?

The Internal Revenue Service (IRS) charges penalties for certain — though not all — tax filing mistakes. Mistakes that can lead to penalties include:

•   Not filing your return and paying your tax by the due date

•   Failure to pay proper estimated tax

•   Substantially understating your tax liability

•   Understating a reportable transaction

•   Filing an erroneous claim for a refund or credit

Even if you don’t get hit with a penalty, you may still get an unexpected (and unwelcome) tax bill, either right away or possible years later.

How often does the IRS make mistakes with tax returns?

The IRS does not release statistics about how often they make mistakes, but it is almost certainly less often than taxpayers make mistakes. If you think that the IRS has made a mistake when processing your return, you can either contact the IRS directly or work with a reputable tax professional to rectify the situation.

How do I know if I filed my taxes right?

The IRS generally will accept your tax return within a few days. This means they’ve received it and scanned it for basic errors, like missing information or major red flags.

Once your return is accepted, the agency will begin a more detailed process of examining your return — they’ll check your income reports, verify the deductions and credits you’ve claimed, and ensure everything aligns with the tax laws.

If you’re due a refund, the IRS will approve it once they are satisfied your return is accurate. Typically, you can expect a refund within 21 days after you’ve e-filed.

Keep in mind, though, that the IRS has three years from the date you filed your return (or April 15, whichever is later) to perform an audit and potentially charge you additional taxes. That’s why it’s a good idea to keep your tax records around for at least three years.

Photo credit: iStock/kynesher

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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SOBK0124058

A career as a psychiatrist can be highly rewarding, both professionally and financially, with the average annual salary in the U.S. coming in at $259,497, according to ZipRecruiter.

Becoming a psychiatrist requires a lot of dedication and time — 12 years on average. But as the need for mental health services outstrips demand in the U.S., the outlook for a career in psychiatry is strong. Indeed, the U.S. Health Resources & Services Administration predicts a shortage of 39,550 psychiatrists by 2030 if current supply and utilization patterns continue.

Read on to learn more about how much a psychiatrist makes, as well as the job’s requirements, duties, and benefits.

What Are Psychiatrists?

Psychiatrists are medical doctors who specialize in mental health. They are qualified to assess mental health disorders, including depression, anxiety, and substance abuse, and prescribe medication.

The duties of a psychiatrist generally include:

•   Assessing patients’ mental health through interviews, reviewing medical history, and testing

•   Delivering an accurate diagnosis and developing a treatment plan

•   Consulting with other mental health professionals

•   Prescribing medication if needed

•   Following up with patients and making treatment adjustments if necessary

•   Documenting each patient’s diagnosis and progress

•   Offering emotional support and coping mechanisms

•   Staying current on new developments and psychiatric treatment methods

An effective psychiatrist should be able to:

•   Be compassionate and empathetic. These qualities allow a psychiatrist to understand what’s going on with their patients.

•   Establish trust. Patients need to feel safe opening up to their doctors.

•   Be patient. The road to mental wellness can be a long one.

•   Possess strong communication skills. Psychiatry is not a job for introverts. A successful psychiatrist needs to be able to actively listen, provide guidance, and communicate solutions.

•   Maintain flexibility. The job requires flexibility in both your schedule and treatment approaches in order to provide customized help for each patient.

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How Much Do Starting Psychiatrists Make a Year?

Professional psychiatrists can make over $100,000, even as a starting salary. Both the bottom 10% of earners and beginning psychiatrists make, on average, $133,000 a year.

What is the Average Salary for a Psychiatrist?

Being a psychiatrist is one of the highest paying jobs in the U.S. The typical salary ranges from $68,500 to $399,000 a year, with the average psychiatrist salary in the U.S. landing at $259,497. However, location makes a significant impact on how much a psychiatrist gets paid, with the average salary in New York City coming in at $283,899.

A psychiatrist can command a yearly salary or an hourly wage in a private practice. As for how much a psychiatrist makes in an hour, the national average is $125.

What is the Average Psychiatrist Salary by State?

Psychiatrists can earn competitive pay no matter where they live and work. However, geographic location does have an influence on how much a psychiatrist makes. Here’s a look at the average psychiatrist annual salary by state.

Recommended: What Is a Good Entry-Level Salary?

Psychiatrist Job Considerations for Pay & Benefits

A professional psychiatrist can earn a high salary while helping to improve the lives of others. But there are a lot of steps you need to take in order to become a licensed psychiatrist. These include:

1.    Earning a bachelor’s degree, preferably in psychology, biology or biochemistry.

2.    Taking the Medical College Admission Test (MCAT). The MCAT is a challenging standardized test used as an admissions requirement when applying for a medical degree program.

3.    Applying to and attending medical school. Medical school typically takes about four years to complete as a full-time student.

4.    Completing a four-year medical residency. This is required to obtain your medical license and involves treating patients in real-world scenarios. It’s generally a good idea to obtain your license in the same state you intend to practice in.

In addition to a strong job prospects and a high salary, psychiatrists who work for a public, private, or government institution may be eligible for the following job benefits:

•   Health insurance — medical, vision, and dental

•   Life and disability insurance

•   Vacation and holiday pay

•   Paid sick leave

•   Retirement plans

•   Malpractice coverage

Of course, if you open your own practice, you’ll have to cover those benefits yourself. But you’ll have the flexibility to set your own schedule and session rates.


💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.

Pros and Cons of Being a Psychiatrist

As with any profession, there are positive and negative sides to being a psychiatrist. Here’s a closer look at the jobs pros and cons.

Pros of Being a Psychiatrist

•   Opportunity to help others: One of the reasons people enter the field of psychiatry is to help change people for the better and, in some cases, save their lives.

•   Mix of patients: You’ll be challenged with helping people of all different ages and backgrounds to achieve mental wellness.

•   Work in a variety of places: Psychiatrists can work in private offices, hospitals, schools, mental health clinics, and other institutions.

•   Form relationships: In addition to establishing relationships with their patients, many psychiatrists have the opportunity to work with other professionals, including psychologists and occupational therapists, as part of a holistic treatment plan.

•   Be your own boss: If you decide to form your own practice, you’ll be able to set your own schedule and session rates.

•   Job security: As noted above, psychiatry is one of the types of jobs that are currently in demand.

Cons of Being a Psychiatrist

•   Emotionally draining: Caring for patients, especially those who have dealt with traumatic experiences, can be emotionally exhausting. The stress of responsibility coupled with intense sessions can potentially lead to professional burnout.

•   Substantial educational debt: The 12 years or more of school plus residency required to become a psychiatrist can be costly and leave you a lot of student loans to repay.

•   Irregular hours: Many psychiatrists have to be flexible in order to accommodate working patients and don’t work the traditional nine-to-five hours.

•   Fluctuating income: The goal of any psychiatrist is to help people manage their lives on their own, which means patients (hopefully) come and go. If you have a private practice, you could experience fluctuations in income from year to year.

•   Physical danger: Unfortunately, some more severely mentally ill patients can potentially become physically violent with their doctors.

•   Risk of lawsuits: Patients can sue their psychiatrist for prescription errors, a misdiagnosis, or session misconduct. Your place of work or private practice will have to have malpractice insurance.

Recommended: Best Entry-Level Jobs for Antisocial People

The Takeaway

You can earn a lot of money working as a psychiatrist if you are willing to spend years on your education, with the average psychiatrist salary coming in at $259,497. But helping others is also calling. When you make a difference in a person’s life, the rewards can be more than financial.

Whatever type of job you pursue, you’ll want to make sure your earnings can cover your everyday expenses. To help ensure your monthly inflows always exceed your monthly outflows, try creating a budget and check out financial tools that can help track your income and spending.

FAQ

Can you make $100k a year as a psychiatrist?

Yes. The average salary range for a psychiatrist is $68,500 and $399,000 a year.

Do people like being a psychiatrist?

While the job can be emotionally draining at times, many psychiatrists find tremendous satisfaction in helping others.

Is it hard to get hired as a psychiatrist?

No. There is currently a great demand for psychiatrists, and there will likely always be a need to help patients with mental health issues.

Photo credit: iStock/SDI Productions

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SORL0124032

Your mind and body may be ready for a sunny beachside spring break in Cancun, but if you’re living that broke college kid life, you may imagine your spring break looking more like a week at home, scrolling through Instagram and binging Netflix.

However, it is possible to plan a spring break trip on a limited budget. And yes, even a college student’s budget can be stretched for spring break fun! If you’re wondering how to plan a spring break trip without living off instant noodles for the next month, we have some tips to help you get a well-deserved vacation from those long nights spent studying in your dorm room.

Keep reading for some of our best tips on making your spring break trip dreams happen on a budget.

1. Start Planning Early

Waiting until the last minute to plan a trip could mean missing out on cheaper flights, hotels, and even popular ticketed attractions. If you’re going to a hot destination during a peak travel season, which includes spring break for many destinations, then you could blow your travel budget on the flight alone, leaving you without enough money for food and lodging.

2. Make a Budget & Stick to It

Before you even leave for your destination, it’s smart to create a travel budget. What can you reasonably afford to spend on accommodations, transportation, entertainment, meals, and shopping? Having a budget could help you avoid splurging on expensive dinners or overspending at local shops.

Recommended: How to Save for a Vacation: Creating a Travel Fund

3. Find Off-Season Destinations

If Cancun for spring break is too pricey for your college student budget, don’t stress. There are a number of great destinations that are off-season in the spring, ranging from the more rugged Jackson County, North Carolina to the Big Apple.

4. Only Travel as Far as You Can Drive

It’s about the journey, not the destination, right? You can make that (semi) true by taking a road trip with a few friends. On a road trip, you don’t need to follow any set schedule. Since there’s no flight or train to catch, and often no hurry to reach a destination, you can make spontaneous decisions and discover hidden gems along the way.

5. Avoid Tourist Traps

Doing spring break on a budget generally means skipping touristy destinations like Miami, New Orleans, and Cabo. However, there are plenty of cheaper alternatives to these locations that can save you money and that will probably be far less crowded, too.

6. Reach out to Friends & Family

If you have friends or family in another city, reach out and ask if they’d be willing to host you. If they agree, you could get some free lodging and meals out of it. Plus, you’d be connecting with locals who could guide you through the city and give some tips on cool and free stuff to do that you might not have found otherwise.

Recommended: How to Balance the Urge to Travel and the Need to Save

7. Ditch the Plane Ticket

Planes and cars aren’t the only way to land at your tourist destination. You can do spring break on a budget by hopping on an Amtrak train or a Greyhound bus, both of which have destinations all over the country. The best part? You can catch up on some work, sleep, or relaxation while you enjoy the ride.

8. Don’t Forget about Cruises

You could spend a fortune going to just Miami or Los Angeles. Or, you could check out some cheaper cruise options that could potentially take you all over Alaska, the Caribbean islands, or a slew of other destinations for less. There are even cruise options designed specifically for college students.

9. Consider Pitching a Tent

Do you get motion sickness in cars or boats? With camping, your feet will be firmly planted on the ground, and your budget will also likely stay down to earth. You can camp out in many destinations across the U.S. and even abroad, be it under the stars near a national park or near a great fishing hole in the Carolinas.

10. Look For a Deal

Sites like Groupon and LivingSocial offer a number of travel and hotel deals both for individuals and for group travel. Checking out which hotels are offering promotions could help you save when booking accommodations. You can also find deals on attractions near where you’re vacationing, too.

11. Sign Up for a Spring Break Volunteer Experience

Many colleges offer a program called “alternative break,” which allows students to travel and volunteer during their spring break. If your college doesn’t offer any alternative break trips, you can still find some opportunities through organizations like Habitat for Humanity and United Way.

12. Be a Tourist in Your Own State

If airfare is out of the question for your spring break budget, a budget-friendly alternative could be touring your own state. You can take a spring break road trip around your state or even take multiple day trips, the latter of which could allow you to have most of your meals at home with no hotel needed.

13. Fly on Unpopular Days

No, it’s not just your imagination: There are some days that are cheaper to fly on than others. If you’re not tied to a set departure and/or return date, use the flexible date search on a travel or airline site. This can help you find the cheapest travel dates for your trip.

14. Sign Up for Price Alerts

One helpful way to ensure you’re getting the best possible deal on your trip is to sign up for price alerts, a free service offered by several travel companies, such as Kayak, Skyscanner, and Google Flights. These sites track prices daily and alert you in real-time when the price changes for a flight, hotel, or rental car you want.

15. Ask for Extra Snacks

If you’re flying to your destination, be sure to grab the airplane snacks. And if you like the snacks, ask for seconds! You may be able to snag a free snack to help tide you over between meals when you land. The worst thing that can happen is that they say no.

16. Consider Airbnbs or Hostels

For those looking for the best tips on how to plan a spring break trip, one not-so-obvious one may be skipping hotels altogether. Staying at an Airbnb or hostel could be a cheaper travel hack than even a budget motel, especially if you don’t plan on spending much time in your room anyway.

17. Use Public Transportation

While Uber may be one of the handiest apps to have while traveling, relying on ridesharing and taxis could end up costing you a small fortune, especially if you’re traveling in a big city. Using public transportation could cost you a fraction of the price of an Uber, plus it will allow you to explore more of your destination as you navigate around subway and bus stations.

18. Bring Your Own Food

Grocery costs may be on the rise, but the cost of dining out can really wreak havoc on your spring break budget. If you want to try the local cuisine, you can typically do so much cheaper by going to a local grocery store and buying premade meals there or, better yet, making your own meals using fresh, local ingredients. This option may only be available if you’re staying at an Airbnb or hotel with a kitchenette, though.

19. Eat Out for Lunch, not Dinner

Eating out for dinner will often cost you far more than eating out for breakfast or lunch. And if you decide to eat out for dinner still, skip the drinks and desserts. These items typically have higher markups than other items on the menu. Plus, when it comes to desserts, the quality (and quantity!) may not be worth it — many restaurants don’t even make the desserts they serve.

20. Ask About Complimentary Hotel Meals

Students looking for spring break trips on a budget won’t want to miss out on this tried-and-true travel budget saver: Before booking your hotel, ask if they have any complimentary meals, such as a continental breakfast. It may not be as fancy or Instagram-worthy as the hottest brunch spot in town, but it will likely be a lot better for your budget.

21. Use The Free Hotel Coffee

Most hotels offer free coffee either in the lobby in the mornings or through small coffee makers in your room. It may not be as fancy as your usual Venti Coconutmilk Latte with two pumps of salted caramel, but it won’t cost you anything.

22. Look out for Free Samples

Looking to score some more free snacks? Add local farmers’ markets to your itinerary. Many markets are full of free samples, so you may even be able to scrounge together a free lunch. You may also be able to score free swag, like t-shirts and reusable bags, from local vendors and businesses, your hotel, or the local visitor’s center.

23. Prioritize Free Activities

Sure, you can spend $50 for a museum ticket. Or, you could search online for some free museums nearby. Many hot spring break destinations offer free walking tours, free museum days, and a plethora of other free activities, such as parks and beaches.

24. Find a Travel Buddy (or Four!)

You’ll find that going on a budget-friendly spring break trip can be a lot easier if you team up with friends. Pooling your college budgets together may even help you to afford nicer accommodations or a more far-flung destination.

25. Cash in Credit Card Rewards…

If you have a rewards or cashback credit card, you may want to save up your points to help fund your epic spring break. Having a travel rewards card can be an easy way to save on travel, especially if you’re able to use that card on purchases before heading out on vacation, which could help you build up even more rewards points.

26. …And Earn More Rewards While Traveling!

Using your rewards credit card on vacation may not help you save for your current trip. But if you rack up more rewards during your trip, you’ll already have a new vacation fund started before you even come back from spring break.

27. Research Student Discounts

Catching a movie or eating out during spring break? Ask about a student discount! You may be able to score some sweet savings even before your vacation, as companies like Expedia often offer student-only travel deals. You can also try StudentUniverse , which helps students get discounts on hotels, airfare, and more.

28. Ask About Membership Discounts

A ton of college discounts exist, but don’t rule out membership discounts you could get from family members. For instance, Costco, Sam’s Club, AAA, and AARP all offer travel discounts to their members. It may be worth asking some relatives about their memberships to save big on your spring break trip.

29. Avoid Transaction Fees

Transaction fees can be a real budget-killer if you’re traveling abroad. And even if you’re stateside, ATM fees can also put a dent in your spring break savings. So you may want to ask your card issuer about fees and plan accordingly to make sure you have enough cash on hand to avoid them.

30. Use Hotel Toiletries

TSA-approved toiletries can be overpriced, and buying them when you arrive at your destination may also mean overpaying for toiletries that you have loads of at home. The best alternative? Decant your own shampoo and conditioner into smaller bottles you can snag at The Dollar Store. Or, better yet, just use the hotel toiletries. They may not be what you’re used to, but your budget will thank you.

The Takeaway

Wondering how to plan a spring break trip on a budget? It may not be as hard as you think. If you’re willing to try off-peak destinations and hunt for discounts, you can save a ton of cash. Spring break trips on a budget don’t have to be a drag, either. You can still go to popular destinations if you create (and stick to) a spring break travel budget. Using rewards and cashback cards can also help you save on airfare and other travel expenses.

SoFi Travel has teamed up with Expedia to bring even more to your one-stop finance app, helping you book reservations — for flights, hotels, car rentals, and more — all in one place. SoFi Members also have exclusive access to premium savings, with 10% or more off on select hotels. Plus, earn unlimited 3%** cash back rewards when you book with your SoFi Unlimited 2% Credit Card through SoFi Travel.

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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.

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.

Photo credit: iStock/AzmanJaka