Royal Mail: beware the lessons of Black Monday

[TrueBlueTerrier]

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Comment: Buying Royal Mail shares sounds like a one-way bet. That's what investors in the Eighties thought after a string of successful privatisations. BP proved them wrong.

The incredible hype around the sale of Royal Mail shares is sucking many people into the stock market who have never been there before. The message they are hearing is: everyone is buying Royal Mail shares, the price is bound to go up when trading starts next week; I'm a mug if I don't buy too.

Well, there's a good chance that this is exactly what happens and everyone is happy. The shares have been priced to bring about this conclusion. But it's not a certainty.

We've been here before. The first big privatisations of the Thatcher era were also "priced to go" – pitched to make an immediate profit likely. People started seeing them as an easy route to free money and enthusiastically backed BP when its shares went on sale in October 1987.

Then, right in the middle of BP's privatisation, Black Monday happened.

Shares on Wall Street fell by 25pc in a day, London saw two successive falls of 10pc. It was immediately obvious that as soon as BP's shares started trading their price would fall below what investors had paid in the flotation. This is exactly what happened, and banks had to step in and buy unwanted shares at inflated prices.

But the funny thing was that many private investors, almost certainly the first-timers, carried on applying for shares in the float even though they would be able to get them more cheaply in the open market when trading started. They simply didn't understand enough about the stock market to realise that events had overtaken the flotation and turned it from a one-way bet into a guaranteed loss.

My worry is that plenty of today's Royal Mail investors are no better informed and fail to appreciate that any number of events between now and next week could "do a BP" on their dreams of instant gains. After all, the American government is half closed, markets know that easy money is on the way out and the eurozone is, as ever, able to tip into crisis without warning.

In our webchat today, one reader asked what would happen to the Royal Mail share price if the market were to crash later this week. Presumably he was genuinely unaware of the answer: that his shares were likely to be worth less than he paid for them.

We all want to encourage a culture of investing for the future, and knowing about the stock market is a big part of that. But the BP story tells us that you need to understand it a little before you write the first cheque to your stockbroker.

[motch]

all depends on whether USA raise their debt ceiling or not in time. (It will be done otherwise bankrupt, well they're bankrupt already technically)