How to Read a Prospectus Before Purchasing IPOs

Businesses have many requirements that they must fulfill before they can offer an IPO, or initial public offering, of stocks. United States law requires companies to report specific information about their businesses if they plan to distribute an IPO. Both financial and personal data is gathered and used to create a document called a prospectus. All stock buyers should read a prospectus thoroughly before purchasing IPO shares.

Instructions

Difficulty: Moderately Easy

Learn to Read a Prospectus Before Purchasing IPOs

1. Get a hard copy of the prospectus from either the company or the underwriter. Depending on the type of IPO campaign, the prospectus may only be available through the underwriter.
2. Set aside some time to read through the prospectus before purchasing IPO shares. A disciplined investor won't jump on an investment before learning about the company.
3. Start by looking at the profiles of the company's officials and officers. A prospectus contains information about what each person does within the company as well as their monetary compensation.
4. Look for any beliefs among the company's employees and executives that conflict with your own. You may, for example, find out that the CEO financially supports organizations and ideologies that you are morally against. This conflict of interest may change your mind about purchasing IPO shares for this company.
5. Use the prospectus to track the development of this company. The document needs to contain all of the property holdings of the company and when they were bought. You can use this information to create your own sense of how the company is growing.
6. Check the prospectus to ensure that the company is not downsizing its holdings and using the IPOs to get out of financial ruin, as this would not be a good investment.
7. Read and analyze the specific information about the IPO shares in the prospectus. This part of the document will tell you what benefits and privileges the company gives its shareholders. Pay attention to how dividends are paid to shareholders and if you can vote with the other shareholders or if the IPO shares only entitle you to a share in the profits.

Tips & Warnings

• A typical underwriter is going to try to sell IPOs in any way possible. He may spin the information in the prospectus to try to make the company look better. It's your responsibility to form your own opinion of the company based on this legal document as well as outside research.