Investopedia’s buzzword this week is about getting into a new stock with a Toehold Purchase. This is A purchase of less than 5% of a target company’s outstanding stock made by an acquiring company. A toehold purchase of just under 5%, while not a significant stake in a firm, allows the shareholders a “toe-holds” grip on the company and its decision making. In the instance of a shareholder vote, toehold shareholders hold a significant place in such votes.
Companies are free to purchase up to less than 5% of any company. But once a company purchases 5% or more of another company, the acquirer must file a form 13D with the SEC and explain to the target firm in writing the reason for the purchase of 5% or more of its stock. Filing a form 13D additionally notifies the public of what the company is intending to do with its toehold purchase, and may be a precursor to a hostile takeover.