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You can easily make $1,000 in minutes but the risks are huge

David Taylor
·Contributing Editor
·4-min read
The financial market is having great impact over the markets around the world and the Australian Dollar. In this picture there is a chart of the stock market breakdown and two AUD banknotes and coins, due to the recession caused by Covid-19 flu
Image: Getty

I was young, I’ll use that as my excuse.

I worked for a firm that facilitated roadshows for companies looking to list on the Australian Securities Exchange.

The process is pretty straight forward: a company looking to grow will apply to list on the ASX boards, and will then travel around the country looking for sponsors – investors that will buy stock.

You can show your interest by asking for a prospectus, which is a document containing all the information about the company, including its financial position.

A large investment firm will usually underwrite the listing. That essentially means it’ll buy up any remaining shares that aren’t bought by investors during the roadshow, or at least settle on a price (listing price) to ensure the shares will be bought up.

The temptation for me was too great.

I began collecting prospectus after prospectus, buying mainly mining exploration companies.

They had a history of listing at 20 to 25 cents and shooting up to 30 cents in the first few hours of trade… and making money was easy.

If you spend a few thousand dollars and pick up say 10,000 shares, that’s an easy $500.

Or if you bought in at 20 cents and it goes to 30 cents, you’ve made $1,000 (with 10,000 shares).

It’s a sound investment

Now, let’s be clear. This is not gambling. Far from it. If you read through a prospectus and determine the company has strong financial prospects, it’s just smart investing.

The problem is few people do this.

Most people think, ‘Sure, I reckon that tech company is onto a good thing’, so they fill out the forms, join the share registry, and hope for the best.

This IS a recipe for disaster.

If you know how to make your way through a prospectus though, and you’re savvy about the language management use to describe their companies’ prospects, you’re equipped to do well.

Like panning for gold

Of course, the reality is, while some stocks rocket up as soon as they hit the boards, many don’t – they either fall at the open of trade or don’t move at all.

A major investment fund was quoted in the Australian Financial Review last week as only choosing one IPO to throw money into last year – and that’s in a year where we saw an IPO boom.

The investment firm was patient, waiting for the ‘right’ stock to come up.

And that’s the big caveat here. This is not just about your willingness to read through a tedious prospectus and sign-up.

It’s about being discerning and picking the right ones.

Risks

Ironically, if you have success investing in an IPO you’re more likely to want to go back for more.

This is dangerous.

I began thinking I couldn’t lose, so I simply invested in every second IPO that came onto the boards.

Ultimately, I lost just as much money as I gained, and wasted a lot of time filling out forms.

And if you are not able to stop, you can spend more and more money, and if you do this, I guarantee you’ll lose a lot of money because not every stock, or even every second or third stock, will rise in price.

Some, unfortunately turn down pretty quickly and don’t rise again for a very very long time.

Commsec sums it up nicely:

“Companies may offer shares at what they perceive to be a discounted rate or they may offer some form of added value to compensate investors for the risk of buying shares in an unproven listed company.

“Never forget that the value of shares can fall as well as rise, once listed.”

How it’s done

A company will decide to list, offer up a prospectus, and sell its wares on a roadshow.

Investors can buy in through a stockbroker, or with the company directly, by filling out forms (personal information and bank details).

Once the stock hits the boards, you become an investor and you can hold onto the stock or sell out at any time.

It’s no different to buying shares normally really, you’re just doing it at the first available opportunity.

More folks are doing it

The Australian Securities Exchange says 2020 was a bumper year for company listings and says it is the "busiest half for new listings in recent times".

The ASX confirmed 115 stocks have hit the boards this year, with 87 floats in just the past six months.

"Our pipeline extended well into the third week of December when it normally is wrapping in the first," an ASX spokesperson said.

"It's definitely been some time since we have experienced so many listings in such a concentrated period.”

As COVID hit and folks’ incomes have come down, there’s evidence of a big wave of retail mum and dad investors trying to get in on the action.

There’s no doubt it’s one way of making a lot of money quickly, but equally it’s also a way of losing a lot of money quickly too.

When do they ever not go hand in hand?

@DaveTaylorNews

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