The hot tip on a hot tip: How to risk profile an IPO

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So your friend just gave you a hot share tip at the weekend barbecue? Before you jump straight on your computer and blow the kids’ education fund, it pays to do a bit of research.

Like any other financial investment, an IPO (Initial Public Investment) can, over time, yield a good return on your initial investment.

Equally, it could end up losing you a packet!

In order to minimise the risk of throwing your hard-earned cash away on an unprofitable investment, research is required.

Here we give you a checklist of things to look for when considering whether your friend is onto a winner or a dud.

Always read the prospectus

Because the company will not have sold its shares before, it can be difficult to get a feel for how much they might be worth.

The prospectus contains a wealth of company-specific information that can give you a better idea of corporate worth, direction and potential.

Lodged with ASIC (Australian Securities and Investments Commission), the prospectus should contain much of the data you need to make an informed decision on whether the IPO is right for you.

Key points to consider

  • Are you able to interpret the financial statements provided? You need to be able to gain a clear picture of matters such as past performance and profits, asset base and financial management.
  • Do you know enough about the overall sector? The sector in which the company operates can make a big difference to the way in which it achieves its financial goals.
  • What sort of market does the company operate in? What is the competition? How much demand is there for the goods or services on offer? Does this company have any competitive advantages which could give it the market edge?
  • What is the calibre of the management team? Do they have a strong track record of success in the sector? What do they bring to the organisation that could result in greater profitability as time goes on?

Final considerations

No matter how good an IPO opportunity sounds, it always pays to seek a second opinion.

And that’s where we come in. If after reviewing the prospectus you still love what you see, come in and have a chat with us.

We’ll help you devise a well-balanced investment strategy to ensure that even if your friend’s tip does go south, you won’t have all your eggs in the one basket.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.