When Google initiated its Initial Public Offering (IPO), the stock market was in an absolute uproar.  Some analysts thought Google’s pricing strength would be a momentary fad, while others thought it was a strong investment.  For those who did invest, they saw dramatic increases in share price – currently well over a $500 jump per share in three years.  But just because Google is a success story does not mean that every IPO is a good investment.

IPO fundamentals

When dotcom companies were the rage, you could invest in nearly any IPO and obtain huge returns on your investments.  However, many could not maintain their first-day gains for long.  If you knew enough strategy to get in and out at opportune times, you could make huge profits.  But when the dotcom bubble burst, the playing field changed dramatically and you could no longer expect to make a quick profit flipping stocks.  Now the focus is on the long-term outlook of an IPO.

Finding a profitable IPO is no easy task.  Even Google’s IPO release was met with much skepticism.  IPOs have their own set of risks that differ from the average stock, and thus, there are several fundamentals you must keep in mind during your research and analysis.

Research before you buy

First, it can be hard to find objective research.  Unlike companies already on the market, private companies do not have analysts reviewing each corporate move.  A prospectus may disclose information, but it is somewhat biased since it is written by the company.  You will need to scour for unbiased information on the company, its finances, its competitors, and its history.  Learning as much as you can about the company and industry is crucial to making a good investment. www.hoovers.com is a great source of information about IPOs.

Choose the broker wisely

Next, look for strong brokers.  While a big investment bank may still bring a dud to market, more often than not, good brokerages will bring out good companies.  Use caution if the IPO is being underwritten by a smaller brokerage.  A smaller broker can allow individual investors to buy pre-IPO shares, while larger ones will not let you invest in an IPO as your first investment.

Evaluate the boring details

Read the prospectus.  Although it is biased, and a dry read, it will give you valuable information on the company.  If the money is going to be used to repay loans or buy equity, it may not be a good IPO for your portfolio investment.  Research, marketing, and expanding the company are better reasons for creating an IPO.  Read all the projected figures carefully.  You can receive a prospectus from the broker that is underwriting the company.

Safe and steady does the trick

Always use caution in your decisions.  There is a significant amount of uncertainty surrounding IPOs, and it is in your best interest to be careful.  You should be especially cautious if your broker recommends an IPO, since there is a good chance that you are receiving the leftovers from the big investors.  There may be a reason why the bigger investors are leaving the IPO alone.  Brokers usually save IPOs for their best clients, making it difficult for small investors to add the solid IPOs to their portfolio.

Invest only after completion of the lock-up period

Lastly, wait for the lock-up period to end.  This is a contract between company insiders and the underwriters, preventing them from selling stock.  If you see that these affiliated individuals continue to hold onto their shares once the lock-up has expired, it will usually mean that they see a good future for the company, and that it might be a good investment for you.

If you have taken the appropriate research and analysis measures, and the stock flies through all of those filters, then it may be worthy to invest in that company’s IPO.  You may have another Google on your hands, where you can make a quick fortune.  However, it is not easy to pick the good investments from the bad, and the more research and analysis you can conduct, the better the chances are for your portfolio.