It is not surprising that the European market in new initial public offers (IPOs) is pretty dead at the moment. With these stock markets currently in a state of high volatility there is little demand for new equity issues with investors deciding they would prefer to keep their funds in cash for the moment. However, there are still some international IPOs especially coming from the Chinese-based companies. Sadly many recent issues from this part of the World have been hit by scandals associated with some highly questionable accounting practices. As a result the Hong Kong market is now attempting to get involved as some Chinese private enterprises look to launch IPOs. In a recent article in the FT ("Hong Kong looks to private IPOs from China") there was a very good discussion of some of the regulatory issues involved in this process. The main focus was attempts to control the practice of "short-selling" which involves investors selling shares in these new IPO companies when they do not own them. This is a highly risky practice and it can be seen to cause even greater instability in new IPO issues. In a previous blog (September 2008) I explain more about this activity. You might like to read this to learn more!
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Kevin Boakes
- About Kevin Boakes:
- I used to work in the City but gave it up in the late 1980s when we had our first child. The hours were not too compatible with a good family life! Since then I have taught Finance and Financial Markets at Kingston University. In addition I have acted as a consultant to a number of Investment Banks. My great working passion is trying to explain complex financial market terms as simply as possible. I also like to make it interesting by relating it to the real World. I wrote the book with the aim of showing lots of other people that Finance can be interesting and accessible. I hope you like it!
3 comments:
Although short-selling may worsen the stability, it might be worth the risk in order to increase economic activity which could potentially increase demand for shares.
When it comes to short selling, opinions are divided. While some people support short-selling and say that it increases the liquidity of stock markets, improves information efficiency and the mechanisms of risk sharing, others are not in favor of this trading strategy. They say that it generates high volatility, panic selling, and market crashes. Especially when it comes to the companies that are affected the critical view is widespread. Short selling increases the pressure on the stock prices of the company to a great extent. That leads to rapidly falling share prices. But the companies start to take the short sellers on. They try to intensify the relationships to their investors and to bind them closer to their shares to keep them from deals with hedge fonds like short selling. The short sellers are dependent on the deals with big investors. They need someone to borrow the shares from to sell them on the market and to rebuy them later on for a cheaper price. Unfortunately for the companies those deals are quite lucrative for the investors as they receive a fee for lending the shares out. In the case that they refuse to lend them out to the short sellers, they go and get them somewhere else. So why not lend them out and earn a bit extra money? That is the reason why it is going to be really hard for the companies to keep their investors from making deals with the short sellers. To which extent the companies’ efforts have an effect on the investors is yet to be seen.
i agree that short-selling may worsen the stability, as it increases the pressure on a companies stock prices. This in time affects the share prices as they start to fall. However this can be a risk worthwhile at uncertain times, as an increase in economic activity can lead to more demand and shares
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