Flipping Mad
In a bull market, a share issue, even when overpriced,
will typically reach a small premium to the issue
price, perhaps 10–15 per cent, in early secondary
market trading. This can generate further demand,
particularly when the free float is small, which limits
the proportion of shares publicly available. But if
the share price is higher than the fundamentals justify,
there will later be a rebalancing.
If you subscribe to the issue, it is often best to
make hay while the sun shines and to flip or stag
the shares, which is to sell them for a quick profit
in the first few days of trading.
The book runner will try to discourage flipping because
a mass exodus from a new issue could send the share
price into free fall. It could make the deal appear
to have been overpriced, which brings adverse publicity,
and the bank may be forced to support the share price,
a process known as stabilization.
The book runner will not dare to discourage the large
institutional investors from flipping the stock because
it will need their participation in future share offerings.
It may take a more cavalier attitude to private investors.
In the July 2000 flotation of Carphone Warehouse,
the mobile telephone retailer, private investors received
priority allocation only if they would hold the shares
for three months. The same pressure was not put on
institutional investors.
Buy recently issued stock in
the secondary market
If you are interested in a new issue and it is likely
to be overpriced, wait until the deal has taken place.
If the shares are worth buying, they should still
be so in the secondary market. Should the share price
then be too high, you can wait until it has declined
before you commit your money. |
