In what cases is the laddering used
Laddering comes from the English word, which means ladder. Its scope of application is market research, investments and anything related to illegal transactions in the IPO process.
This tactic involves investing in financial instruments, which have different maturity dates. This principle resembles a ladder, from which the name comes. Investments are made upward, where each new investment has a longer term than the previous one..
It’s easier to understand the process by example. The simplest of them is the purchase of securities that belong to the same issuer, but they have different periods of maturity. By buying government bonds, which expire in 2020, 2021, 2022, an investor builds such a ladder. Such a strategy makes it possible to diversify the capital, but not to the full extent, as the investment object is only one. However, this option provides an opportunity to reduce damage if the interest rate changes. For example, if it decreases in 2021, the investor can make a profit for 2020, where the interest rate was higher. Later, he can invest this capital in more profitable assets, and profit can be made from bonds with a late maturity.
Another feature of laddering is the gradual withdrawal of funds, which can then be used for reinvestments, property acquisition and other plans.
This tactic is also used for an IPO. A ladder here is formed by raising the value for a portion of the shares when a public offering is made. In this case, the investor first needs to buy an overpriced stake and then a large stake at a lower price. Laddering in this case can be used for fraudulent purposes by insiders. They buy shares at an undervalue in order to sell them several times more expensively.
These actions are considered criminal and are prosecuted worldwide. However, it is very difficult to trace such machinations in most cases, as underwriters very often negotiate with potential buyers and everything goes without attracting extra people. And as a result, all parties are satisfied.
Underwriter is considered an intermediary between the company and the issuer in the procedure of initial public offering on the stock exchange. It is advantageous for large investors to act according to such a scheme, because having overpaid for a small number of shares, you can buy a much larger package at a favorable price. In this case, insiders from the transaction receive a good commission on the difference in the value of securities, and are interested in this type of branding.