| Summary: | In recent years, we have seen a lot of interest in Initial Public Offerings. With many
of these IPOs opening at large premiums over their offer prices, it is no wonder
that many are also given the impression that there are easy profits to be made by
applying for IPOs. Not surprising, many are tempted to stag IPOs. As potential
investors ourselves, our interests are of course triggered.
In addition, many studies have also shown that because of under-pricing,
deliberate or otherwise, handsome profits are indeed a possibility. However, we
notice that only a few studies have attempted to incorporate the effects and
opportunity costs into the picture. This is especially true in the context of the small
investor who applies for 1-9 lots that would typify much of the share investing
public. This study attempts to plug in that gap and hence it was felt that a
simulation taking the place of a uninformed stag could intuitively incorporate
elements of probability and true costs.
This simulation study examines the veracity of the general notion that stagging
IPOs is almost always profitable. It also tries to ascertain the magnitude of such
returns and analyse any general trends from the results. Of secondary importance
too, is for it to be useful as a guide for the potential investor/ stag.
Historical data which included offer prices, first day closing prices, etc. For 1 05
IPOs which were listed on the Mainboard and SESDAQ between 1984-1994 were
obtained from relevant documents found in the SES library and NTU Library 2. A
computer simulation program was written in QBASIC. This used historical data to give overall returns in absolute terms for a investor using a 1-9 lot application
strategy. 8,000 runs representing the 8,000 stags who applied for aiiiPOs for
1984-1994 were made for each scenarios we envisaged. The proportion of losses
sustained for each scenerio and lot strategy was also measured to give an
indication of the risks involved.
Results from the simulation indicate several things. One is that the number of loss
incurring applications well exceeds that of profit making applications although in
total, the return is still positive. Two sweet points exists at the 2 and 5 lot strategies
for which mean returns are markedly higher with correspondingly lower risks of
loss incidence. It appears that segregating the issues based on price and type of
market does not produce higher returns or even lower risks except perhaps for
SESDAQ issues.
The implications for stags are several. The general notion that stagging issues is
almost always profitable is a misconception. The stag stands to lose small amounts
of money much of the time but in the long run and for most people, overall returns
from such investments are still positive. In the absence of other factors, the stag
perhaps stands to do better if he applies for IPOs using the 2 and 5 lot strategy.
Stagging IPOs based on cost considerations is a risky proposition and should be
avoided, instead if risk avoidance is of utmost importance, subscribe only for
SESDAQ IPOs though this will mean halving the mean overall returns.
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