Thursday, 12 April 2012

Share purchase plan's - When things don't go to plan

In a previous post I outlined the benefit of share purchase plans and how they were often a great way to make 'free' money.

The example I used was the SPP that I was then participating in - the QBE SPP. This particular plan allowed you to apply for more than your proportionate share and as the price of the share was trading above the SPP price it was as guaranteed a profit as one could normally get.

However where the above conditions exist almost all investors will see the same thing and I'm fairly sure most applied for over allocations. The result was a scale back which I expected however QBE scaled back allocations to such an extent that it was possible to actually lose money in the process (which I did). A summary is shown below:

Original expectations

  • Shares originally held: 32

  • Shares applied for: 1,401 ($15,000 worth)

  • Expected profit on SPP shares: ~$2,400

Actual outcome

  • Shares actually allocated: 3 ($32.10 worth)

  • Cash refunded: $14,967.9

  • Gross profit on SPP shares: $6.90

  • Days cash held by company: 17

  • Lost earnings on cash (@7% p.a.) = ~$49

  • Actual loss: $42.10

While the loss was annoying and not substantial, compared with the expected profit it was quite a big variance. I did a bit of research and such a big scale back is almost unheard of so I was a bit unlucky with this one. The rationale for investing in SPP's still holds however the lesson from my experience here is that you should always keep in mind that a massive scale back like this can result in a loss for the investor.

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