These days the term IPO (Initial Public Offer) gets thrown around a whole lot more than it was in the past. It seems like every few months another company announces that it’s intending to list on the local stock market.

Many of these companies excite the regular man or woman because by now most people know that an IPO often means that (assuming the company has good fundamentals and is priced attractively) there’s an opportunity to make some money.

The Wigton IPO has played a large role in furthering this thinking as it was heavily advertised and heavily subscribed by many regular people. The people who participated in that IPO would have seen an over 90% increase in the value of their investment in the six months since it listed on the Jamaica Stock Exchange (JSE). Of course, the stock market isn’t all winners, and while Wigton may have been a great investment so far for anyone who bought at IPO and still holds, there have been other companies who’ve had IPOs and their share prices since the IPO haven’t performed as well, with some even falling below their IPO price. So, the natural question then is, how can you know what companies are good before they list? Well there is no sure way of knowing what exactly will happen after a listing, but the best chance for success is to:

1. Understand the company that is listing and their offer.

2. Speak with a licensed financial advisor.

To get the second one done, you can find qualified advisors at any of the 12 brokerage houses in Jamaica and they should be able help you. The first point, however, understanding the listing company and the offer, can be done all on your own, even if you’re just a newbie or “not a finance or numbers person”.

Part of getting involved in raising your financial literacy, as a so-called newbie, is to grow your knowledge about the elements in that sometimes mystifying finance space. One element that I’ll try to expound on today is the document that accompanies every IPO, the prospectus.

So, what is a prospectus? A prospectus is a legal document that must accompany every IPO in Jamaica.

The Financial Services Commission (FSC), as part of its mandate to regulate the financial space in Jamaica, has made it a requirement for every IPO. This is done for the protection of the public as a prospectus is required to give all important information about the company that is listing and the details of the offer.

The prospectus must disclose all material information including, among other things, a description of the issuer’s business, its audited annual and unaudited financial statements, where they tell exactly how much money they’ve made in the past, and a management discussion and analysis (often called a MD&A) where the company leader(s) gives an overview of their financial conditions and their personal analysis of operations. They also tell who the company leadership is, listing out board members and providing their contact information and showing their signatures for verification along with identifying the lead broker carrying out the offer on behalf of the listing company. Prospectuses also tell how the company intends to use the money they get from the IPO, and they can also carry projections where the company tells how they intend to perform in the future and give insights as to how they plan to pay dividends. And finally, a prospectus has to tell you the offer being extended, meaning how many shares, what price they’re being offered at, what dates the offer opens and closes on, what the steps are in the event of a refunding and what rights and responsibilities the company is reserving. And of course, they explain the steps to apply for the IPO.

All prospectuses include information telling how to apply for the IPO and most prospectuses include an application form at the back for you to fill out and submit to your broker (or the lead broker) if and when you decide to participate in the offer.

Now you may see these documents as being complicated or requiring special knowledge to understand, but one proper look at a prospectus will show you a secret that many have already learned. While they may be long and sometimes seem boring, prospectuses are written for the general public (that is, you and me) to understand.

That is not to say that more advanced financial knowledge won’t bring a greater understanding, it will, but these documents are written in such a way that once you are able to read (and I assume that if you’re understanding this, then you can read), then pretty much everything in it is explained. Prospectuses even come with a glossary, where general terms used in the prospectus are defined.

A lot of the length of prospectuses is actually often a result of so many things that are considered ‘simple’ in finance, being told, then explained so anyone who isn’t in finance (again, this means us) can understand it clearly.

So, now that you know what a prospectus is, and that they aren’t actually scary financial monster documents but just guides to help anyone see and grasp the details of an offer, go out and check out a prospectus.

Prospectuses are available on the JSE’s website in their Investor Section (www.jamstockex.com/investor-centre/prospectuses/). Give any of them a read and see if what seemed daunting before isn’t just a comprehensive explanation that you can understand if you read it all. Of course, I know that many of us will still not want to read these documents or just not have the time. So that’s why you should never forget Step 2. Speak to a licensed financial advisor. A good advisor will have already read the prospectus, understood it and should be able to not just explain any bits you still don’t understand, but provide sensible, well thought out advice on whether you should buy into the IPO or not.

I hope I’ve helped you to understand what a prospectus is, and maybe even pushed you to check one out and see how much you understand. If you do it right, you’ll find that your financial knowledge will grow, and like so many other things, the more you do it, the easier it will get.

This is Randy, signing off until next time.

Randy Rowe is a Strategy Consultant and lead writer for www.everymickle.com. He is NOT an investment advisor. You can follow him on Twitter at @RTRowe. He used to dream of a world where everyone came with their own prospectus and you could read it, then decide if you wanted them to enter your life…but he scrapped that idea after imagining what his own prospectus might say…and wondering who would be everyone’s lead broker….w