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Ipo Question

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Hi guys. I was wondering if someone could help me with this. Excuse my ignorance as I'm new on shares/equity etc.

A friend of mine has been offered via his stockbroker some shares in a company prior to its market float. He has been told these will be at a discount to what they will be worth once floated(I know thats not a cert).

The question is how does one go about trying to figure out whether the price they are being offered at actually represents value over what they will be worth once floated. Which indices/numbers should I be looking at

Any help offered will be appreciated as I am a novice. I do however accept this is a high risk stategy

ps I'm obviously asking because I'm thinking about joining him :)

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Hi DRS. I wouldn't count as an expert but have some understanding of this. I too am currently looking at a company (called Europol), which is raising some funds, supposedly ahead of an IPO on AIM. I will just make a few general points and these are of course all my own opinions and you should do your own research:

- Number 1 question is "is this a good company". You can look at their share offer document (I assume it is always biased), check out their web site (in the case of the one I'm looking at it's pants!), and look at the management's experience and the existing customer base and figures.

- Look at the market: are they in a growth sector, how competitive is it, do they have some key knowledge/technology/relationships

- If you feel the company has some potential in a decent market, then the best way to look at a valuation is to look at their quoted competitors and get an idea of their p/e (price/earnings) ratio - this is usually stated on online web sites and essentially relates the share price to profits. So, if a company has a p/e of 20, then if it makes £1m profit the company would be valued at £20m. If it is in a sector with an average p/e of say 8 (housebuilder p/e's are usually low like this), then it would value the company only at £8m. Essentially, if the p/e in an industry is higher it is beause the market forecassts more rapid growth for that industry going forward, although this is also a signal that it could be higher risk or might be over-valued - dot com shares had ridiculous p/e's of 50-100 times.

- With the above, you can then check whether the shares you are being offered are at a good price based on the number of shares in issue + those being issued and based either on existing profitability of forecast profit going forward.

Also bear in mind that a lot of businesses say they will IPO and actually don't - the IPO market can open and close pretty quickly either generally or for certain industries. At that point, there is a risk that you could be left without a proper means of trading the shares. I always think it a good idea to talk to the CEO ahead of making an investment if it appears to be on the risky side.

I have only done a couple of these so I am sure there is better advice from others on this board, but I hope that helps.

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