37 - price in the prospectus is consistently lower than...

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What is stock flipping? Do investment banks encourage this kind of practice among their clients? Explain. There are many tools available to investors to make quick profits. One tool that is available is flipping stocks - the practice of buying initial public offerings (IPO) at the offering price and then reselling them once trading has begun, usually for a substantial profit. This is more commonly done by institutional investors than retail investors, because institutional investors get most of the IPO shares at the offering price. Flipping is most profitable in a hot IPO market, when the price of an IPO often rises dramatically above the offering price on the first day. The very short-term returns on IPOs are surprisingly high around the world. In the United States, the share price in the typical IPO closes roughly 15 percent above the offer price after just one day of trading. Researchers refer to this pattern as IPO underpricing, meaning that the offer
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Unformatted text preview: price in the prospectus is consistently lower than what the market is willing to bear. To capture this initial return, an investor must be fortune enough to receive an allocation of shares from the investment banker and to sell those shares at the first opportunity. Not all investors are allowed to participate in the investment banks allocations. Investment banking firms underwriting new issues generally discourage flipping, in large part because it can depress a stock's price in the secondary market (Flipping Penny Stock, 2010). For investors who buy IPO shares when they begin trading in the open market in the hope of making a quick profit, the rewards are much smaller, and the risks much greater, than those faced by investors who participate in the initial offering. Thus overall we can say that stock flipping is not a good idea to look for small profits rather investors should stay long in the company and enjoy dividends plus stock appreciation....
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This note was uploaded on 10/15/2011 for the course FIN 550 taught by Professor Smith during the Spring '11 term at Berklee.

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