Imagine you’re trying out a new restaurant. Now, picture if the restaurant promised that if you didn’t enjoy your meal, you could get your money back. Sounds like that can’t go wrong either way right?
A stabilization fund in investing works a bit like that promise.
How Does a Stabilization Fund Work?
When a company offers its shares to the public for the first time (an IPO), it might set up a stabilization fund. This fund is like a safety net for the new investors. Here’s how it works:
- Buying Shares: You buy shares (tiny pieces of the company) during the IPO.
- Stabilization Period: There’s a period, usually 30 days, where the stabilization fund is active.
- Price Protection: If the share price falls below what you paid during this period, the fund steps in.
- Selling Back: You can sell your shares back at the original price if the price drops. This means you don’t lose money.
For example, IPOs like Macro and Efinance had stabilization funds in place, providing investors with a safety net during their initial offering periods.
So, Why Would I Want a Stabilization Fund?
A stabilization fund is great because it helps protect your money. Here’s why it’s good for you:
- Safety Net: Just like having a satisfaction guarantee at a restaurant, the stabilization fund ensures you don’t get hurt financially if things don’t go as planned.
- Confidence Boost: Knowing you have a safety net can make you more confident about investing.
- Only Upside, No Downside: With a stabilization fund, there’s only potential for profit and no risk of loss. You basically can’t lose money, making it a riskfree investment.
Let’s take an Example..
Let’s say you try a new restaurant and spend 50 EGP on a meal. If the meal isn’t good, the restaurant promises to give you your 50 EGP back. Similarly, with a stabilization fund:
- You buy shares for 50 EGP each.
- Within 30 days, if the price drops to 40 EGP, you don’t have to worry
- You can sell the shares back to the stabilization fund for 50 EGP, just like getting a refund at the restaurant.
Invest without worrying about Losses
A stabilization fund in investing is like having a satisfaction guarantee at a new restaurant. It protects you if the price drops, helping you feel safer and more confident about investing. With this safety net, you can focus on learning and growing your investments without the fear of falling. Plus, with only upside and no downside, it’s a risk free way to start investing.
