New Issues — To Buy or Not To Buy

by David Jenyns on May 6, 2009

So you’ve picked some stocks. 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. These are “Best Efforts,” “All or None,” and “Firm Commitment.”

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.

If you’ve invested in a solid company, you’re on the right track.

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