Small Investor suggestions: your firm is asking you to address some of the client's questions for a Frequently Asked Questions (FAQ) segment that will be posted to the company's website
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You work for an large investment firm and recently wrote a position article on your firm's approach to investing for the small investor, titled "Investing is for the little guy". The article now appears on your company's website. It has, interestingly enough, generated e-mailed responses from potential clients and your firm is asking you to address some of their questions for a Frequently Asked Questions (FAQ) segment that will be posted to the site soon.
Specifically, some of the respondents have compared investing in the stock market as a no win situation and only the institutional investors can win. These respondents would like a response that further clarifies your firm's position regarding risk in light of these type of statements.
In your response, your company has asked that you address these questions building upon the risk-return concepts you identified in the position piece you wrote for the firm.
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"This is consistent with the idea that informed investors take advantage of small investors only when the small investors are..."
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INVESTING IS FOR THE LITTLE GUY!
When they are positive, sentiment investors are willing to pay higher than fair prices for shares. Bookbuilding investors take advantage of the sentiment investors' optimism, selling them their shares at high prices during the first trading day. In the long run, share prices will return to their fair value, at sentiment investors' expense; this explains the new issue puzzle.
On the other hand, when sentiment investors are too pessimistic, they will pay only lower-than-fair prices for shares. Naturally, investors who are informed about the fair value of a stock would not sell their shares in this situation, so the first-day returns of shares should be fair.
When small investors are optimistic - that is, when they price shares above the midpoint of the indicative price range set by the underwriter at the beginning of the grey market - the relationship between grey market prices and the aftermarket price is significantly stronger than when small investors are pessimistic. This is consistent with the idea that informed investors take advantage of small investors only when the small investors are optimistic.
IPO investors are indeed guided more by intuition than by information - and that, sooner or later, they pay for their disinformation. Small investors with a hunch about buying into an might be better advised to conduct some market research before going straight to their ...
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