Bought IPO shares? Why you shouldn’t rush to sell even if they aren’t gaining much

Dubai: With an increase in investors applying for an IPO nowadays, UAE-based market experts have been assessing how there has not only been an increased awareness about how an initial public offering (IPO) works, but also how it can help an investor plan his or her long-term financial goals.

Both in the UAE and elsewhere in the GCC, shares in companies that are looking to newly list and publicly trade on the stock market are now increasingly being offered to investors through a process referred to as an IPO. As a result, a record number of investors have been investing in them.

“If you decide to invest a portion of your savings into a company that has just decided to publicly list its shares on the stock market, you could make your money reap enormous gains,” said Brody Dunn, an investment manager at a UAE-based asset advisory firm. “But that’s not without its risks.

“As a company issuing an IPO lacks a track record of operating publicly, investors buying into them should be aware that with IPOs, you can’t be hasty to sell. While timely decisions bring you good returns over a period of time, that period maybe short or long depending on the stocks purchased.”

When do you take a call to sell your IPO shares?

A common IPO exit strategy used by existing investors is to sell off their stake upon the IPO launch in return for cash profits. Another option is to hold on to shares for the long term with the hopes of growing their savings (or selling to cut losses) in direct correlation to the company's performance.

Once the firm is listed, you can sell IPO shares or retain them to achieve your long-term financial goals. However, if you choose to sell your IPO shares, you must plan ahead for it. Bear in mind there is a lock-up period on selling IPO shares to avoid mass dumping of shares and slump in market value.

“Generally, there is a lock-up period on selling IPO shares to avoid dumping of shares that can cause the market value of shares to fall. Verify if there are any restrictions for you to sell the shares and make your selling decision accordingly,” added Dunn.

“As IPO involves risk like any other market instrument, you should consider your risk-taking capabilities and appetite to handle any impact of selling your IPO shares on your portfolio before making any decision.”

Should you sell IPO shares on the day of the listing?

It is widely believed that most IPOs tend to perform well on a listing day as compared to other trading sessions. “Selling on a listing day is considered better than selling after 2 to 3 years, given how IPO shares have performed historically,” said Zubair Shakeel, a UAE-based investment manager.

“But pay attention to the ‘pre-market session’, a period of trading before the market opens, to decide whether to sell on listing day or not, as it gives an estimate of where the stock is headed. If the session has a return of 70 to 80 per cent, then it’s a good decision to sell on the day of 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. 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.

But then the question arises how much of your IPO shares do you sell? “If you're not sure how to evaluate the growth then you might want to sell a small amount (10 per cent to 20 per cent of your stock) now and additional stock incrementally over time if you have the opportunity,” said Shakeel.

Is it prudent to sell your IPO shares in instalments?

Another strategy you can implement is selling small quantities at a time. “You can choose to sell after the company’s quarterly reports are out. This can prove beneficial for you as it will give you an idea of whether the stock prices are likely to fall or rise in the upcoming quarter,” added Shakeel.

Another alternative is to sell 50 per cent upfront and 10 per cent every quarter. “The difference is instead of selling equal quantities every quarter, you sell 50 per cent upfront, recovering your initial investment,” he added.

“The remaining 50 per cent, you can sell in 5 instalments of 10 per cent each based on the company’s quarterly earnings or financial results. This strategy has by and large worked well with companies listed at around 40 to 50 per cent gain.”

Aside from the risk of holding too much of any stock at an IPO position, it's also important to consider what level of risk you can take given your personal financial situation, cautioned Dunn, with the obvious repercussion of potentially incurring losses.

Bottom line?

When participating and buying stocks in an IPO, you not only become a shareholder of the company, but you can enjoy profits from the sale of your shares on the stock exchange, or you can receive dividends offered by the company on the shares you hold.

(What are dividends? Dividends are regular payments of profit made to investors who own a company's stock. Dividends are payments a company makes to share profits with its stockholders. They're paid on a regular basis, and it’s a way investors earn a return from investing in stock.)

Even just the annual dividend income of a highly successful company can exceed the original investment amount, given a few decades' time. So even if the shares don’t rise as much with time, routinely receiving dividends are a prominent perk of holding onto the shares for a long time.

“While selling IPO shares is completely dependent on your financial goals, before selling, you need to know how much profit you make when you decide to sell and exit the market, irrespective of the selling strategy used,” added Dunn.

“Generally, investors tend to sell their shares on the listing day of IPOs as the prices are higher compared to the year-end. Simply put, there is no right time to sell the IPO shares as they may differ from one investor to another based on their financial goals.”