Question

In 1980 and investor bought 12 initial public offering of oil and gas companies, stock he held each of those for approximately one month and then sold them. The investment rule he followed was to submit a purchase order for every firm commitment initial public offering of oil and gas exploration companies. There were 22 of these offerings, and he submitted a purchase order for a approximately $1000 in stock for each of the companies. With 10 of the 22 offerings he was unable to invest as no shares were allocated to him. With 5 of the 12 offerings that were purchased fewer is in that requested number of shares were allocated and he received fewer shares then he wanted.

The year 1980 was very good for oil and gas exploration company owners: On average for the 22 companies that went public, the stocks were selling for 80 percent above the offering price a month after the initial offering date. The investor looked at his performance record and found that the $8400 invested in the 12 companies had grown to $10,000, representing a return of only about 20% (commissions were negligible). Did he have bad luck, Or should he have expected to do worse than the average initial public offering investor? Explain (your discussion should center on the difference between Under and oversubscribed offerings and the implication to the investors return)

Answer 1

IN the  given case Investor had no bad luck,but as he invested in 5 oversubscribed IPO and got fewer share apart from other 10 where no allotment to him being made.As apparent from the case that year 1980 was very good for Oil & Gas Companies in which he Invested through public offering, therefore listing price get jumped on issue opening day and after that Prices go down due to some stability measures and sale due to profit booking.Further 7 out of 12 companies are not over subscribed and definitely there price were not opened up as high as other oversubscribed companies. Further 80% above price is an mean of average of all companies. But we can say definitely he missed chance to optimized profit due to lapse at timing decision.Still he had good position @20% return chances but he was also not expecting to do worse than average initial public offering Investors.

however in the case of under subscribed Issue prices get improved after some time as against over subscription when first sharp decline in price often occurs and thereafter price stability arrives .In both cases market making is performed by Institutional Investors as well retail subscriber and regulatory bodies.

Therefore Investor should take decisions of holding or selling accordingly, in prudent manner to take advantage of diversification of their portfolio. One thing more, Investor should take care of systematic risks also because they are not reversible.

However shortening of Oversubscribed shares are advisable and long position is recommendable in Under subscription.but there are other factors also like growth and prospects of company and overall economic and political scene as birdview.