Selling strategies for IPO (Post Listing)


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  • Author samco

Once you have invested in an IPO the next thing to concern yourself about is to have an exit strategy in order to maximize your gains. In order to have an efficient exit strategy, there are certain factors to take note on. This article will try to explain the consequences of those factors and list few exit strategies as well.

The article is divided into the following parts.

 

Factors:
Factors to consider before deciding to sell

 

Strategies:
Selling strategies for your stock

 

Factors
Before you decide to sell your stock which you have been allotted, the following factors have to be noted.

-     Tax implications

If you sell the stock on the first day of its listing or any time in the first year, you will have to pay ordinary income tax on the gains. If you have to qualify for the more advantageous capital gains tax rates, you have to sell the stock after the first year.

-      Restrictions to sell

Verify if there are any restrictions for you to sell the stock. There is usually a “lock up” period for members of the company or the people associated with it. Depending on the company, this lock up period could be three months, six months or even longer.

-      Suggestive restrictions from the brokerage firm

At times, the brokerage firm might request you not to sell the stock until the lock up period expires. While the firm does not have a legal ability to restrict your decision to sell if you choose to, your future allocations might get affected if you violate certain brokerage firm restrictions. It is always better to be aware of any such limitations.

Strategies

The second section of this article is dedicated to different selling strategies. Now while we do not have a crystal ball to know the future of an IPO stock and exit accordingly, the following suggestions might be helpful in different circumstances.

-      Sell on the listing day

Many analysts and researchers believe that an IPO performs better on the listing day as compared to other trading sessions. This reference also depends on the timing of the stock being listed (end of the Bull Run). When compared to one, two or even three year returns, in most cases, listing day returns stand out as the winner. Hence, it might be a good strategy to sell your stock on the listing day.

A helpful tip is the pre market session before the company gets listed. The pre market prices give a very good estimate of where the stock is headed and a solid 70% - 80% returns in pre-market are a good point to sell.

The above strategy is the simplest and can save you future losses. When a company gets listed, it is exposed to the public scrutiny and market sentiments.

-     Sell enough on the listing day to cover your expenses

This strategy helps you to have your costs covered, while staying invested in case the stock shoots up in the future. To illustrate, assume you have been allocated 100 shares at INR 200. Your total investment is INR 20,000. If the stock gives you a return of 33% on the listing day, the opening price would be INR 266.

Under these circumstances, you can sell 75 of the 100 shares to recover your investments. From this point onwards, the remaining 25 shares could be kept for a longer period of time for a fundamentally strong stock.

The above two strategies could also be applied after the “Lock up” period expires.

-     Sell in installments

Another strategy which you can implement is to sell a little quantity at a time. Your usual selling window should be after the quarterly earnings reports come out. This gives you four opportunities in a year to sell.

For instance if you have been allocated 200 shares for an IPO, divide it by 8. Henceforth, sell 25 shares every quarter for the next two years.

This is the opposite of dollar cost averaging. Instead of buying equal quantities of shares, you sell equal quantities of shares. IN effect, your average selling price becomes the average stock price over the next two years.

-     Sell 50% upfront and 10% each quarter thereafter

This strategy also is an installment selling strategy but instead of equal installments, you sell 50% upfront thus covering majority of your costs. If the stock is listed at a healthy 40% - 50% gain, this strategy can be very effective. Once again, selling at the quarterly earnings reports is a good window of opportunity.

The below table summarises the conditions and the strategies to apply

Conditions

Strategy

Listing day gains of 70% - 80%

Sell all on the listing day

   

Listing day gains of about 33%

Sell enough to cover your expenses

   

Average listing day gains

Sell in installments

   

Listing day gains of 40% - 50%

Sell 50% on listing day and rest in installments

Final word

The future is unpredictable and hence, there should always be an exit strategy. The above strategies are a good starting point and can be tweaked as your need may be. The important thing is to have a strategy and a diversified portfolio.

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