IPOs - Speak The Basics (Very Good Reading) (15)

Competition --

Given that monopolies are illegal, competition will always be there, but you better watch out if some well-run, well-capitalized firms are on the list.

One name that jumps quickly to mind: Microsoft.

in "Risk Factors" and "Business."


Other risk factors --

Patent disputes, heavy indebtedness, and litigation are just some of the other more dangerous risks.

Read the entire "Risk Factor" section carefully, but don't get overly discouraged.

Too-small pie -- No matter how effective a company is at selling widgets, there needs to be enough people willing to buy those widgets at high-enough prices.

A company's target market should be large and rapidly growing.

This information can be found in the "Business" section.



Declining valuation --

Pre-offerint an IPO be priced so they get a huge return on their initial investment, often as much as 10 times.

You can find out what those original investors paid on average for their shares in the section entitled "Dilution."

Compare that to the offering price.

If the two prices are close, then you can bet pre-IPO investors at one point were too optimistic about the valuation for the company.

While it may seem like a good deal to buy a company for about the same price as earlier investors, there's a reason for the lower valuation.

On very rare occasions, IPO investors can actually pay less on average than the company's pre-offering backers.