Royal Mail, damp squib for private investors?

So, here we are on Day 1 of the grey market trading for Royal Mail shares and as widely predicted the share price is showing a healthy premium already at around 445p. However, as the IPO was so heavily oversubscribed the Government was forced into deciding how many shares the institutions and private investors would get. Both will no doubt be disappointed.

For the private retail investor, an allocation of just 227 shares will go to anyone who asked for £10,000 or less. Over £10,000 you get nothing. Institutions are getting 67% of the issue, with priority apparently being given to pension funds and those with a long term intent.

That's all very well, but for most small investors, especially those that wanted more than the minimum, an allocation of just 227 shares may seem hardly worth keeping. The potential dividend on this might be nice and beats cash on deposit, but it's hardly likely to be a holding factor especially as the shares are currently up around 33%. You might as well take that couple of hundred pounds worth of immediate profit as it represents 5-6 years of potential dividend payments. The point is, if every small investor who had asked for say £5000 or under had got the full allocation, chances are they might be inclined to keep them as that's a chunky dividend worth holding on to. Adding to your 227 shares now will be 30%+ more expensive, thus the dividend yield is lower. Of course, you could wait and hope the price sells off after the initial euphoria, which is a possibility.

All of this would have meant that the institutions got less, but there again if they are serious about wanting the shares they would then have to go into the market and buy them. Chances are that many of the smaller serious investors will simply offload their 227 shares as not really worth keeping and it will be the institutions that hoover these up over the weeks ahead.

Retail trading doesn't begin until next week. Holders in ISA's cannot buy until the official start date of the 15th, because until then they are not classed as an ISA investment. There might be quite a lot of volatility between now and then and it will be interesting to see if the current price holds especially if the small investor decides to get out quick and just bank any profit as quickly as possible once official trading starts.