Protecting Yourself from losses when choosing IPOs

Unfortunately, for each successful IPO there are many that deceit investors. If you are an individual investor that is trying to invest in IPOs should be precautious and reduce long term loss risks. Giving them attention to what brochures say does not assure success, but is a good defense.

Observe for the following in brochures:   

• The underwriters: Is the subscribing underwriting company well known? The well known large underwriting companies are generally busy enough to detect the most speculating IPOs. Even then, some immature companies? new issues are underwritten by top underwriters, and stock prices are forgotten after having been introduced in the market. Review underwriter logs with your broker to see for the most recent underwriters.
• Review the number of underwriters in the syndicate. Large groups of syndicates generally expose IPOs more. Besides, large syndicates use a larger amount of brokerage firms to negotiate their new issues and keep the market price.
• Financial statements: Read the financial statements placed on the back of the prospectus. From the balance sheet determine who is financing the assets. Is financing mainly provided for debt bearers or stock bearers? If the total liabilities exceed stock bearers patrimony it could be a sign for you to keep researching. If the company has a setback in their incomes will it be able to meet their debts? If shareholders patrimony is negative watch carefully financial details of the company.

Companies having reported losses that exceed profits retention amount have a negative profit retention. If these negative retentions exceed their capital account amount the company has a negative shareholders patrimony. Determine if the company is in capacity to swap losses for profits in a not so distant future to keep their businesses going.

Lazard has a large debt and a negative value in sites due to is dull performance in stock prices, related to the companies incomes and losses cash flow generates. Friendly Ice Cream chain restaurants, for instance, accumulates operation losses since 1992, but has a positive cash flow.

One can calculate cash flow starting from the net incomes or losses and adding all the items not liquid such as depreciation and redemption From the income statements determine if sales and profits have increased. If a company experiences a raise in its sales, but shows an income loss examine your prospects for comments the near future profits. If profits are not foreseen immediately one has to ask himself why.

An ironic note: if investors had listened to this warning they’d had never bought any of the new internet IPOs in October and November 1998 when prices per stock rocketed. Many of these companies did not expect anticipated earnings until years to come and they were already negotiating millions in sales.

Although internet is here to stay, many internet companies are not benefited from technology. Fever for internet IPOs are not typical for IPOs, and one should not continue to believe that each stock having an idea and without profits will always be a success.

• Think over and reflect on whether it has any kind of backup to overcome future trouble signs to come. Take a step back and think about what could go wrong with the company. What are the risks? Who are the competitors? Who are their clients? Analyze company’s possible risks. If it is too risky, just let it go.

These measures can help you minimize loss risks when investing in IPOs.

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