Dubai: The fear of missing out on investment opportunities, especially those that have a lot of buzz around them like initial public share offerings (IPOs), is quite common among both newbie and veteran investors.
“Companies making initial public offerings (IPO) draw a lot of investor attention,” said Zubair Shakeel, a UAE-based investment manager. “A case in point being the IPOs held during last six months in the UAE have attracted a very high number of applications.
“However, the shares are allotted to a few investors, and that also does not exceed Dh1,000 in value. To cash in on the gains made by a newly listed stock, some investors, who don’t receive an allotment, try to buy it later or remain unsure about taking a position.”
What’s next if you’ve missed out on an IPO?
This is when some investment advisors, including Shakeel, often advise investors not to buy a company’s shares on the day or during the week of its listing. This is primarily because for IPO stocks, there is no history of a price-volume action, so it is difficult to gauge the top.
“In this IPO, people are getting shares directly from the company at some price. If the IPO is oversubscribed, that means demand is higher. So, it will be listed at a higher price. From the listing day, you can buy shares of that company at a higher price, hence missing out on profits,” he added.
“Also, you shouldn't invest in an IPO because the company is garnering positive attention. Extreme valuations may imply that the risk and reward of the investment is not favourable at the price levels. Keep in mind that a company issuing an IPO lacks a proven track record of operating publicly.”
Already it is oversubscribed, thus it will be listed on exchanges at a higher price of 60fils. Now those 9,000 people can buy shares from the exchange at a higher price, while the 1,000 others who profit by selling their share to the exchange.
What happens after shares are listed in an IPO?
Following an IPO, the price of the stock will fluctuate as investors buy and sell the shares. IPOs are typically highly volatile for the first several months of their existence. To company management, employees, and investors, the aftermarket performance of the stock is vital.
After the shares are listed in the stock exchange for trading (buying and selling), those allotted shares in IPO can sell the shares allotted, and those who did not apply through IPO or who could not get allotment, can buy in the secondary market after listing.
The company will decide to issue certain number of shares to the public and other institutions. Once that limit is reached the company may not issue shares at that point of time. They may in future issue shares via an FPO (Follow-on Public Offer), or in the form of ‘bonus shares’ to investors.
Bonus shares are shares distributed by a company to its current shareholders as fully paid shares free of charge.
Can you sell IPO shares immediately after its listing?
“If you are an investor who buys shares in the open market on the day of the IPO, then you can buy and sell at will,” explained Brody Dunn, an investment manager at a UAE-based asset advisory firm.
“However, if you participated in the IPO itself and received shares at the IPO price before the first day of trading, you would be subject to the lock-up period for those shares. A lockup period can range from 90 to 180 days.”
If you don’t get an allotment in the initial share sale, there may be a temptation for those who missed out on the opportunity to buy shares when the shares list. Is this really a good strategy?
If you are an investor who buys shares in the open market on the day of the IPO, then you can buy and sell at will
Is it good for share price to go up after its IPO?
“From an investor's perspective, it is good for the share price to go up after they bought an IPO because it means they can immediately sell the shares they own and make a quick profit,” added Dunn.
“From the company's point of view, on the other hand, it is not good. Because it means the company could have made more money from the IPO if they charged a higher price. Remember, the company only gets the money they raise from selling the shares they are offering directly in the IPO.”
The goal of the company, therefore is to get the maximum amount possible when they IPO. So, if the price remains the same or falls after the share starts selling in the secondary market, that means the company made the most out of the IPO.
Verdict: Should you buy shares of a company after an IPO?
“If you buy shares of a company on listing day, you may invest when valuations are high. You could end up overpaying for the stocks as there may be a 40 per cent to 50 per cent premium during the listing. You must avoid chasing the stocks of a company after a strong listing,” added Dunn.
“You may wait for a few days after the listing to gauge the actual value of the company. You would also find many struggling to get the IPO allotment during oversubscription. Moreover, you must stay with your investment for the long-run if you get the IPO allotment in shares of strong companies.”
The bottom line is if you are looking to buy a stock on the day of its IPO, do so because you expect to invest for a long term because, in the short term, it might not turn as much profit as you hope it would.
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