New issues

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10. Stagging

'Stagging' is slang for the practice of selling new issues immediately after flotation for a quick profit. The UK financial press is also now making increasing use of the equivalent American term, 'flipping'.

The first question to consider is: Why would you want to be a stag (or flipper)? Two legitimate answers might be:

1. You are a short-term trader. You always look for quick profits.
2. You are a longer-term investor, but the price of a new issue quickly matches or exceeds the target price you are hoping for.

If you are a trader by nature, the next question is: Does it pay to be a stag? On the figures alone, the answer would seem to be yes, since most new issues go to a premium in the first few days, though the price often falls back later. But this nice theory suffers from three nasty flaws:

1. Uncertainty about allocations
   You may find it difficult to discover how large your allocation is, or whether you have been allocated any shares at all, before the day of the flotation. Sponsors rarely get around to notifying applicants that early.
2. Difficulties in dealing
   Even if you call the sponsors and find out the details, your brokers may not allow you to deal without prior delivery of your share certificates, or official notification of an electronic transfer of shares into your account.

   If by some means you do manage to deal without knowing the details of your allocation, you risk selling shares you do not own. You will then be obliged to honour your dud transaction by buying the necessary shares at the prevailing market price.

   This could mean substantial losses if the price has continued to rise since your sell order. It is also quite likely that the broker you used may close your account, with all the costs that entails, and refuse to deal with you in future.

   It is clearly best never to sell until you are certain of your allocation. This may make it hard to be a consistently successful stag. But in general it should not prevent longer-term investors from selling at or above their target prices, in the happy event that these are reached soon after flotation.

3. Scaled-down allocations
   Even if stags faced no other problems, their efforts would often still be wasted. Many new issues are heavily oversubscribed, which tends to result in tiny individual allocations. Applications for many thousands of pounds' worth of shares are frequently scaled down into the low hundreds.

   One particularly irritating example was the IPO of Lastminute.com. Each of the 200,000 investors who swamped the sponsors with applications was allocated no more than 35 shares. At the issue price of 380p, these were worth a grand total of £133. At the small premium the shares reached on their first day, that amounted to a miserly profit of £38 before dealing costs! And to add insult to injury, the shares have so far traded below their issue price ever since their first week.

   Any profit you make on holdings of this size is likely to be so small that it is not worth diverting the money from the open market, where you have the potential to deal and profit on a much larger scale.

1. After Sid - a short history of the new issues market 2. Do new issues offer good value? 3. Types of new issue 4. Applying via brokers and intermediaries 5. The prospectus 6. What to look for in the prospectus (1) - directors and advisers 7. What to look for in the prospectus (2) - standard company analysis 8. What to look for in the prospectus (3) - blue-sky company analysis 9. Making your application 10. Stagging 11. A word on warrants 12. A tale of two issues 13. Conclusion

• How to Invest in E-Commerce Stocks