How to Read an IPO Prospectus

Before a company decides to trade its share publically, it releases an IPO prospectus which provides a detailed insight into the company’s operations, management, risk exposure, financial health and the amount they wish to raise through the process. However, going over each and every aspect is time consuming and further leads to more confusion due to the legal terms in the document. Therefore, it is necessary that you interpret each section in way that saves your time and further allows you to understand critical information, which will facilitate you in making a profitable decision.

Instructions

  • 1

    In total there will be nine sections, but for simplicity let’s break them into basic, risk assessment and financial health.

    At first, go through the basics. This will include the Business Review Section, which provides a detail of the company’s operations (products and services). Here you will be looking at the nature of the product, and the competitiveness of the industry as a whole. You will be aided by the Industry section, which will provide a detailed analysis of how the industry is doing, and what are the growth prospects.

  • 2

    Apart from these elements, you must recognize the stock market a company has chosen to operate in. New York Stock Exchange or Nasdaq are the common options but there are other markets as well. The consideration for you here is to understand whether a company wants a more regulated market or not, in which case it may opt for the Over The Counter Bulletin Board.

  • 3

    Go over the Selling Shareholders section and check who is selling the IPO. Moreover, how much money does the company plans to raise. This will help you analyze the investors involved.

  • 4

    Our second classification refers to the ‘risk assessment,’ for which a separate risk section will be provided. Check whether the business is facing any legal battle. However, take a prospective view point, and outline any risk a company may have to face in the future due to product redundancy or entry of new competitors.

  • 5

    Then go through the Use of Proceeds Section to analyze how the money will be utilized. Whether the company intends to use it for expansion or pay out long term loans.

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