If you haven’t noticed the Nigerian Stock market hit 5 year high this week notching up to 40,000 in its All Share Index. This is very well bad news just as it is good news. It is good news for investors who had taken the risk years ago when the stock market tanked and others opted out. Like they say, it is best to buy shares when prices are crashing. Unfortunately, life isn’t that simple and no one likes to take a risk just because everyone isn’t it. The bad therefore is that with the stock market increases investors rewards in leaps and bounds, other may see this as an opportunity to buy and well…SELL.
I read in the papers the other day where the DG of the Nigerian Stock Exchange was very bullish of a return of the primary market, otherwise known as public offers. Public Offers like you very well know are sale of shares by companies looking to raise funds to expand its operation, refinance debt or fund a new investments. This by all means are very legitimate reasons and one I also support. However, public offers present numerous risk for your money which is why I think it sucks. One particular risk that comes to mind is the fact that public offer prices are often over priced. Because companies want to raise as much money as possible they often carry out underhand practices which leads to an artificial jacking up of their share prices. That is why an artificial increase in share price will often precede a public offer.
A predominance of public offers also creates hype effect which mostly leads to a bubble.For example, a company in a pharmaceutical industry may decide to commence a public offer which like I mentioned may be precipitated by an increase in its share price. Other companies may also see their share price increase because of a sudden rise in their average P.E ratios of the industry.
Whilst it is quite conceivable that price increases can be justified especially if the stock is undervalued, it can in turn be unjustified if it leads to an over valuation of a stock that has very weak fundamentals. This is particularly risky for naive would be investors. Public offers also have a way of raising expectations so high most of what they intend to use the money for never provides the desired return on investment. Sometimes, the public offer is so successful the company feels little pressure to deliver on its promises loosing direction and focus from their pre offer goals and objectives. For subscribers of the offer, this can be painful especially if the stocks see little or no post offer appreciation in price and the company produce dismal results going forward. A lot of Public Offers that took place between 2005-2008 had these characteristics.
Public offer also take too long to be concluded and can often last for months before subscribers have access to their purchase. During public offers stock prices are suspended on the floor of the exchange to ensure there is no arbitrage. This can often last up to a month or throughout the duration of the offer. Even after the suspension is lifted it can also take before the shares are allotted to the successful subscribers. This long wait can be the difference between profit making and loss making.