Shares in health insurer Medibank Private Ltd [ASX:MPL] enjoyed a strong debut on the Australian Securities Exchange (ASX) today, outperforming a weak Aussie stock market to close up 7% from its initial public offer (IPO) price at $2.14. Earlier in the session, Medibank Private traded as richly as $2.23. Today’s strong trading session brought handy paper profits to the thousands of private investors across Australia who successfully applied for Medibank Private shares at $2.00 each.
Supply and demand drove today’s price action, as it so often does on the first trading day following an IPO. The government structured and priced the sale of Medibank Private keenly enough to encourage strong interest among heavy-hitting fund managers.
Many of those professional investors would have liked to get more (or any) stock in the IPO, but they missed out due to the government’s allocation policies. Their only option to get their fill was to wade into the secondary market today and buy Medibank Private stock after it started trading.
That buying pressure from big investors who missed out on an allocation — not to mention a large dose of FOMO, or ‘fear of missing out’, among other market participants — drove Medibank Private’s solid gain today.
Investors who bought at $2.00 will be sitting pretty tonight. But I would caution against buying this stock after this initial wave of demand washes away.
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Although Medibank Private’s business model is solid, the stock is currently pricing in plenty of earnings growth. Lofty expectations can be hard to meet, and when a pricey stock misses them, the stock market can turn savage.
I see stronger potential to reap big gains elsewhere.
Cheers, Tim Dohrmann+
Small-Cap Analyst, Australian Small-Cap Investigator
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