Overview

During the middle to late 1990s, the initial public offering (IPO) market was red hot. It was not uncommon to see stocks surge 100 or 200 percent or more in the first few seconds of trading. It was almost like printing money for investors. But which investors?

Traditionally, it is the institutions and wealthy investors that get the hot IPOs. And, yes, the not-so-hot (or dead cold) IPOs go to individual investors. In fact, the Wall Street Journal did an expose on how IPOs were used as a method for ginning new business for investment banks. The focus was on Frank Quattrone, the top dealmaker at Credit Suisse First Boston. He set up a system called the "Friends of Frank" accounts, which included about 160 clients.

Of course, CS First Boston was not the only firm to engage in this rather, just about every firm did. For example, Salomon Smith Barney had special clients who received IPO shares. One was Bernie Ebbers, the CEO and founder of WorldCom, who made about $11 million from IPOs. As for Salomon, it generated hundreds of millions in fees from WorldCom's investment banking business.

However, just as with many other aspects of finance, the federal government has been investigating these tactics, and there is likely to be some sort of reform. In other words, the playing field for IPOs should improve.

But this does not mean you do not have to do your homework. IPOs are full of risks, and analyzing...