Future of retail investor not secure

One of the biggest failings of capital markets in the past, has been the lack of investor education.

Would the various scandals that rocked confidence in the stock market last year have been less traumatic for many, if the so-called retail investors received some form of prior education in marketplace operations?

That is not a guarantee.

After all, the simple truth is that not everyone who can invest in the equity market should put his or her money there. People who have the foresight to get in — and out — of some of the listed companies make investing look way too easy.

However, the damage that this has done to the psyche of many an investor, who laboured under the false notion that the stock market guarantees fair returns in a relatively short period of time, is incalculable. Still, with a little more knowledge in their hands, maybe hundreds would have been wiser, and not burnt their fingers hoping for triple or double digit gains.

Meanwhile, the sharks have made their money and retreated, in anticipation of another windfall when the Government moves to privatise its failing sugar enterprises.

During the Safaricom initial public offering (IPO) last year, those in charge of Treasury peddled the ultimately false notion that investing in Safaricom shares would be a gravy train of sorts for the ordinary citizens.

Under-priced offerings

They completely drowned out the moderate voices calling for less spin, in the countdown to the IPO; those who warned of the dangers of under-priced public offerings of that magnitude, and asked for the total number of shares on offer to be cut to at least a half.

The rest is history.

On Monday, KenGen closed a successfully executed public infrastructure bond issue, following in the footsteps of Safaricom that just a week earlier, successfully pulled through the first half of its own corporate bond.

However, the latest KenGen bond offering introduced a new parlance into the theatre of the retail investor; the "greenshoe option". Simply put, this is a provision in an underwriting agreement, that gives the underwriter the right to sell investors more shares or bonds than originally planned by the issuer.

This would normally be done if the demand for a security issue proves higher than expected and is also referred to as an over-allotment option.

It is a price stabilising mechanism, because the underwriter has the ability to increase supply and even out price fluctuations if demand surges.

But how many investors really understand, or have even heard of, this provision?

And what are the pitfalls, if any of such clauses?

KenGen had to seek authorisation from the Capital Markets authority to insert the clause, as it remains a gray area in legislation for Kenya’s market.

This lack of knowledge deprives investors of the skepticism they need to cultivate in the market, and they end up throwing caution to the wind when their broker recommends an IPO, even though, in most cases, it could be a sign that several institutions have already declined the stock.

Under the current climate prevailing in the stock market, the retail investor risks remaining at the bottom of the food chain, eating leftovers that the "big money" didn’t want.

The fact that solid companies like KenGen and Safaricom can raise money in the local debt market is, as Capital Markets Authority CEO Stella Kilonzo put it on Monday, a milestone.

However, more needs to be done to increase awareness among the investing public. They need to know how to research a company’s history and fundamentals, to look beyond the prospectus and their brokers’ glib tongues for the "hidden traps" that could prove costly.

We are not saying that IPOs should be avoided.

However, with the benefit of history, investors are better off going the extra mile to know what they are investing in, before committing their hard-earned shillings.

 

 

Read all about: stock market NSE IPO initial public offering

 

 

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