Will limited IPO allocations curb individual participation?

In some cases, allocations did not exceed five shares per investor, and in certain offerings — such as those of Arabian Company for Agricultural & Industrial Investments (Entaj) and Al Taiseer Group Talco Industrial Co. (TALCO) — just one share was allocated per investor.

Analysts told Argaam that while limited allocations may affect the attractiveness of IPOs, it is not the only factor influencing investor decisions. Other aspects, such as expected stock performance and issuance premiums, play a significant role. They noted that this limitation might lead some individual investors to shun IPOs going forward.

They also highlighted that IPO funds give individuals an opportunity for higher allocations, the analysts added, affirming the need to revisit allocation mechanisms to ensure broader retail participation and achieve fair balance among investors in the market.

Impact of Limited Allocations on IPO Appeal for Retail Investors

Financial analyst Hussein Al Attas stated that limited allocations may reduce the attractiveness of IPOs for retail investors, but it is not the sole factor determining their participation.

He added that the stock’s estimated post-listing performance, offering price premium, and investor strategy are also key factors influencing subscription decisions. He noted that if the current limited allocation policy continues excessively, it could negatively impact retail investor participation in the local capital market in the long run.

Member of Saudi Economic Association's (SEA) Board Saad Althagfan

For his part, Saad Althagfan, member of Saudi Economic Association's (SEA) board, agreed that the allocation of shares to retail investors has been decreasing. However, he pointed out that individual investors could leverage IPO-focused equity funds, which typically receive a higher share allocation compared to other IPOs.

Viability & Benefits of Retail IPO Participation Despite Limited Allocations

Al Attas emphasized that retail IPO participation remains beneficial despite the limited share allotments, as it allows investors to achieve quick gains. Some IPOs experience strong price surges during their initial trading sessions, enabling investors’ profit-taking even if they receive only a low number of shares.

He also noted that IPOs contribute to portfolio diversification, granting retail investors access to new companies that were previously unavailable. This helps spread risk while allowing entry at an initial pricing level, as offering prices are often lower than the stock's market price post-listing. This provides IPO subscribers with a competitive edge over those who buy shares later on the open market.

Meanwhile, Althagfan added that investor appetite for IPOs remains strong, driving high demand despite the typically low share allocation for individuals, which often does not exceed 10% of the total offering. He also highlighted the appeal of certain IPOs from emerging sectors or for companies with sustainable profitability and strong growth prospects.

Impact of Limited Allocations on IPO Appeal for Retail Investors

Al Attas explained that while limited allocations may deter some investors, it is not the sole determinant of an IPO’s attractiveness. He pointed out that the expected post-listing stock performance could still make an IPO appealing, even with low allocation, especially for offerings that have seen price increases of 30-50% after listing.

He added that some investors focus on the potential return based on the offering price premium rather than just the number of allocated shares. Others may participate in IPOs intending to buy more shares if prices drop post-listing, as seen in some previous offerings.

Meanwhile, Althagfan stated that limited allocations could absorb liquidity, especially when IPOs occur in close succession. He suggested that the solution lies in raising the ratio of shares allocated to retail investors to better match the high demand.

Impact of Limited Allocations on Market Liquidity and Retail vs. Institutional Participation

Limited allocation policies, according to Al Attas, affect various factors related to market liquidity and retail investor participation. He explained that this often leads to increased short-term speculation, as retail investors tend to sell immediately after market debut, resulting in heightened short-term volatility without contributing to sustained liquidity.

He further noted that if such limited allocation policy persists, retail investors may avoid participating in future IPOs, potentially reducing overall demand for public offerings. In contrast, institutional investors typically receive higher allocations, which help stabilize stock prices post-listing but diminishes the influence of retail investors on market movements.

Moreover, he stressed that lower retail share allocation results in a higher concentration of stock ownership among institutions, which could impact long-term stock liquidity.

CMA Role in Balancing Retail & Institutional Allocations

Al Attas emphasized that regulatory bodies such the Capital Market Authority (CMA) play a crucial role in setting allocation standards and ensuring a balance between retail and institutional investors. He suggested several potential solutions, including revisiting the minimum allocation threshold and prioritizing retail investors in certain IPOs.

He also recommended enhancing transparency on allocation criteria and clarifying the distribution mechanism among retail and institutional investors to help investors make informed decisions.

Additionally, offering incentives — such as allocating extra shares to investors who hold their shares for a predetermined period post-listing — could prompt long-term investments, according to Al Attas.

For his part, Althagfan stressed the importance of higher share allocations for retail investors to better reflect high demand levels. This, he argued, would enhance retail participation and create a more balanced market among individual and institutional investors.