Money Tips Network

Stags are one species of the financial menagerie which commentators use to describe different types of investor. Essentially, stags are speculators who believe that a new issue has been priced too low, and who therefore attempt to purchase as many shares as possible. If they have correctly assessed that the issue is underpriced, the shares will immediately rise in value when the issue is made. The stags can then resell the shares and make a quick profit. A good example of a successful stag deal was the British Telecom issue in November 1984. The advising bank to the government, Kleinwort Benson, was particularly worried that investors might balk at such a big issue (over ?4 billion). They thought it safest to err on the low side with the price. However, it quickly became obvious that the publicity surrounding the issue had been so successful that the price of BT shares had risen threefold. Despite the attempts of the government to limit the number of shares bought by any one investor, there is no doubt that some stags made a killing.

It is possible for both the advising bank or broker and the stags to overestimate the likely demand for a company’s shares. If that happens, the price of the company’s shares will drop below the issue price. If that happens, the stag will have to sell the shares and take the loss or hand on to them in the hope that the price will rise. As some stags will have borrowed money to purchase the shares (planning to repay the loan with the help of the profits), a failed issue can hit them particularly hard.

Stags only really emerge for offers for sale; placings and tenders give them little chance for profit. But it would be wrong to suggest that stags are unpopular with new issue sponsors. By pushing up demand for an issue, they ensure its success. The same is true of multiple applicants: people who apply for several parcels of shares or addresses. Keith Best, the Member of Parliament who was convicted of making multiple applications for British Telecom shares, was rather unfortunate. The practice had been quietly condoned for years on the reasoning that it was better to have multiple applicants than no applicants at all.

It was only the sensitive nature of a privatization issue, where profits seemed certain, that caused attention to be focused on multiple applications. Even then, it took a Labour Party researcher to discover Mr. Best’s offence. Later on, when it was discovered that some people had made more than one application for the phenomenally unsuccessful British Petroleum issue, it was suggested that the offenders’ best bet was to plead insanity.