So you've picked some stocks. Now for the next big obstacle: How do you decide to buy or not to buy a new issue? This historical piece has as much relevance today as it did when it first appeared.
Actually, the decision is not as tough as it appears. The offering circular or prospectus should give you a rough idea as to the quality of an issue or what type of underwriting the new company is obtaining.
Remember, underwriting firms are the backbone of companies when they go public. To a large extent, the type of underwriting obtained determines their strength.
Basically, there are three types of underwriting. First, the "Best Efforts" type, which is, according to a Globus, Inc., booklet, "Why Go Public?," "the weakest form of underwriting, because the underwriter agrees to do the best he can to sell the issue but does not guarantee that if he cannot sell the issue, he will purchase for his own account any unsold securities."
The second is the "All or None" type which, continues the Globus pamphlet, "implies that the underwriter will sell the issue completely or return any monies collected from the public and cancel the underwriting if a sale cannot be effected."
The third is the "Firm Commitment" type, in which "the underwriter guarantees to purchase the agreed upon financing whether or not he can resell same to the public. This is the strongest form of underwriting and is used only by top underwriting companies."
So if the underwriter, who probably should know what he is doing, makes a firm commitment to buy the whole issue for his own account in case of necessity, there appears comparatively little risk for the investor in buying the stock at offering or slightly above offering. In order for an underwriter to make that kind of commitment, he must be very selective in his choice of companies being underwritten.
Take Globus, Inc., for example. They specialize in moderate-sized companies, that is, $300,000 to $3 million underwritings. They consider only firm-commitment underwritings, choosing companies that must have an outstanding record of progress, a unique product, or some other special promise. They have made a policy of backing their underwritten companies with various services before, during and after underwriting, including keeping the financial community up-to-date on corporate developments, arrangement of immediate cash or secondary underwriting, recommending other companies for merger or acquisition.
Generally speaking, new issues underwritten by large, long-established houses like Lehman Brothers; Hayden, Stone; Shields & Co. are favored because (1) they have larger resources to back up their underwritten companies in case of necessity, and (2) it should be in the interest of the underwriting firms to support their underwritten issues at a level not below the offering price.
There's a lot to learn once you've chosen stocks and securities, but the one question people always want to know is, when will they make money? That's hard to say. No on has that crystal ball. Invest wisely, avoid high risk, and don't panic. If you've invested in a solid company, you're on the right track.