Now that everyone understands the logic behind making money with IPOs in the Saudi market and how to select new stocks, let's discuss a more exciting question - what if we get allocated shares? What trading strategy should we use? When is it appropriate to sell? How long should we hold?
Observing First-Day Performance
We've previously discussed that new stocks are highly sought after by investors, so short-term stock performance can be somewhat detached from fundamentals. If we look for patterns in historical data, our overall chances of success will be higher.
We analyzed the performance of IPOs on the Saudi main board market from January 1, 2022, to September 1, 2024, totaling 34 stocks. Among these, 27 stocks had positive first-day gains, while 7 had negative gains. In other words, the probability of making money on the first day of an IPO is about 80%. Interestingly, of the 7 stocks that fell on the first day, 6 had negative returns within the first month of listing. Only Luberef was an exception, falling 6% on the first day but rising 1.4% in the first month. Simply put, stocks that fall on their first trading day are likely to lose money even if held for a month.
Therefore, probabilistically speaking, if your new stock falls on the first day, the more reasonable choice is to cut losses early. Continuing to hold will likely result in losses and waste our time.
The reason is understandable. Usually, the first day of listing is when a new stock is most sought after. If it falls on the first day, it indicates that selling pressure significantly outweighs buying pressure. As attention decreases in the following days, the probability of further decline increases. Of course, specific reasons may vary, such as overpricing of the IPO, poor industry growth prospects, or average company fundamentals.
When to Take Profits?
Of course, the new stocks we're likely to be allocated will probably rise on the first day, so when should we lock in profits? We divided the first-day gains into three groups for observation:
The first group consists of stocks with first-day gains less than 10%, totaling 5 samples. We found that although holding for one month yielded positive returns, the difference between the first-day gain and one-month return was not significant. Therefore, when your new stock's first-day gain is less than 10%, probabilistically speaking, it's better to sell early to lock in profits.
The second group consists of stocks with first-day gains between 10% and 30%, totaling 10 samples. Like the first group, holding for one month also yielded positive returns, and 7 stocks had monthly gains higher than their first-day gains. This means that holding for a month is likely to be more profitable than selling in the first two days.
The last group consists of stocks with first-day gains greater than or equal to 30%, totaling 12 samples. The momentum effect is more pronounced in this group, with only two stocks having monthly gains lower than their first-day gains.
Summary
In general, the larger the first-day gain, the stronger the new stock's momentum, the longer the upward trend, and the longer the recommended holding period. Of course, you can also use some technical indicators for timing.
Similarly, when the first-day gain is negative, the risk-reward ratio for continued holding is not favorable.
