Photo: Russell J. Smith via Flickr
A great way to profit from secondary stock offerings is to buy overnight offerings of MLPs (master limited partnerships) offered after 4 pm, and priced overnight to begin trading the next morning. These deals are usually announced around 4.15 pm-5.00 pm. They are often priced at a $1.00-$2.00 discount from last sale, and can range from 1mm-10mm shares in the deal.MLPs carry a high dividend, so they are often purchased by yield-hungry investors. One problem is that an MLP purchase will produce a K-1, and a lot of institutions therefore cannot buy them for accounting reasons. There is always a great incentive for brokers and financial advisors to buy the deals for their clients since there is often a huge selling concession of $1.00/share, which is paid by the company issuing the stock to the broker, and therefore the client doesn’t know about the hidden fees.
The morning after the deal is announced, these stocks usually trade at a discount of $0.10-$0.50 from where they will be priced. So the trade is to buy the deals in the premarket if you can, or on the open if you cannot. Often, as the day progresses and these shares are flipped, the stock starts to trade up and could be at a premium to the deal price by the end of the day. If you hold these stocks for a few days ( in a good market), you will often be rewarded with a profitable trade.
You must be cognisant of the market environment, but this strategy can work well for short term investors in a stable to bullish market.
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