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According to Wikipedia,
an Initial Public Offering (IPO)
is the first sale of stock by a
private company to the public. IPOs
are often issued by smaller, younger
companies seeking capital to expand,
but can also be done by large
privately-owned companies looking to
become publicly traded.
It is often said that the Prospectus
is the Investor’s best friend. In
addition to that here are a few ways
to detect possible red flags on
companies that are issuing their
stock to the public for the first
time.
1.
Business model
– developing a new business model
can be difficult and may adversely
affect a company if it does not work
as expected
2.
Going-concern determination
– this is when an auditor analyses a
company’s books and it is determined
that the company is expected to run
out of cash soon, the best thing is
to avoid this kind of stock
3.
Competition
– competition is a healthy sign but
it is always good to know the
various competitors and their share
of the market
4.
Recent transition to a new business
– this may indicate loss of focus
and/or lack of clear goals for the
future
5.
Negative gross margins
– this may indicate that the company
is not likely to make money any time
soon, that is, if ever
6.
Legal proceedings
– lawsuits may drain resources of a
company and sometimes divert
management’s attention from
profitable business operations
7.
Inexperienced management team
– a public company requires
competent management to run the
business operations if the
management team is inexperienced
this may be an obstacle to the
performance of the company
8.
Operational systems
– a strong infrastructure can handle
increasing amounts of volume so the
ability of operational systems to
facilitate delivery of products or
services in a timely manner is
crucial
9.
Product concentration
– does the company have a variety of
products? If a company depends on
only one product and that product
fails to live up to expectations the
value of the stock of the company
might be significantly affected
10.
Market and customer base
– a company with a potentially large
and fast growing market might be an
ideal candidate for IPO investment.
Young businesses can be considered
with caution.
11.
Low priced stocks
– penny stock IPOs (stocks offered
at extremely low prices) are highly
risky because many of these
companies have little capital with
which to expand their businesses
12.
Prior unsuccessful offering
– this may mean that the company was
not able to convince investors to
purchase the IPO
13.
History of loan default
– if a company has had problems with
defaulting on loans then issuing an
IPO might be an act of desperation
to get out of their financial
troubles
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