Under the Capital Market and Services (Price Stabilizing Mechanism) Regulations 2008, an Initial Public Offering (IPO) issuer may appoint a stabilizing manager, who may undertake stabilizing action in an attempt to prevent or minimize the reduction in the stock’s price.
The stabilizing manager will normally, buy back the shares at the offer price if the market price of the share drops below the offering price to support the IPO’s stock price from the first 30 days of the trading debut. The shares will then, return back to the issuer.
If you think that it is quite safe to buy into IPOs that have price stabilizing managers, you may be wrong as:
- the stock’s price is not freely determined by market forces and may imply a certain form of “price manipulation”
- the post-IPO price may not reflect the true value of a company
- you will not know how long the manager will continue to support the share price and what will happen to the stock’s price once the manager stops supporting the price of the stock
Notes: Please understand that not all of newly listed companies have price stabilizing managers. Most of the time, only big IPO issues appoint stabilizing manager.