The first hurdle to investing in an IPO is actually finding out that one is taking place.

Back in the 1980s, when the British Government privatised industries such as telecoms and gas, it advertised the upcoming flotations on national television and on motorway billboards.

But you won’t see anything like that today!

Reading newspapers like the Financial Times or websites like The Motley Fool can alert you to new IPOs. Firms tend to float during more exciting economic times, so you may well read about an interesting new prospect in the normal business pages, too.

Not all IPOs are open to the general public. Companies increasingly offer their shares only to City funds and the like, on the grounds that it’s too expensive to allow oiks like you or me to get involved. Private investors can buy shares on the open market afterwards, it’s argued, and keeping the IPO in the City reduces the paperwork and other costs.

That’s all true, but it’s hardly in the spirit of a shareholding democracy. Surely the costs should be more manageable in the Internet era – particularly if the City got together to create a standard platform to enable retail investors to take part?

Not allowing the general public to take part in an IPO can give it the air of an Old Boy’s Network, especially if the share price soars on the first day of trading!

How to invest in an IPO with the big boys

Once you’ve discovered a potentially attractive IPO that’s open to private investors, you need to read the prospectus to find out all about the company and to evaluate its prospects.

These days you can usually download the prospectus from the company’s website. Alternatively, you might write or call the company or one of the banks taking part in the IPO, to see if they’ll post you a paper version.

Reading the prospectus is where the hard work begins. You need to study the company, its business plan and the risks of failure, as well its management and its rivals in some depth. You must also think hard about the likely flotation price you’ll pay for your shares. It may be a great business, but you need to pay a fair price to have a decent chance of making money.

Studying a new company like this is a massive topic, so please read my upcoming post on evaluating a potential IPO investment for a list of things to consider. Don’t just invest on a tip in a newspaper, whatever you do!

Hint: Take note of the closing date for applications before you begin your research. IPO open periods can be very short – sometimes only a few days!

Assuming you like the company and the prospects for its shares, you can then make your application (typically by post) and wait to see how many shares you’ll be awarded.

• If the IPO is over-subscribed, then you probably won’t receive all the shares you requested. What happens next in this case varies – sometimes only big funds making multimillion pound investments will get any shares, other times all applicants will get a reduced allocation. If this happens then hey, at least the company is in demand! An over-subscribed IPO will usually result in the company’s shares rising when they first trade on the stock market.

• Be more worried if your IPO is under-subscribed. In this case too many other investors have stayed away, perhaps because they spotted problems you missed or discounted. You’ll get all the shares you asked for, but you may wish you hadn’t. They’ll probably fall in price once trading begins, at least for a while.

IPOs are tricky investments, because the company has no record of trading as a public company, and because lots of investors are trying to estimate the company’s value without a public share price as a common touchstone.

It’s vital you do your research before you invest in an IPO, but it’s also important to realise that you don’t need to get involved at all. Many IPOs are over-priced, and so prove poor investments.

Taking part in an IPO can be exciting and sometimes lucrative, but the slow and steady approach to investing is better for most people.

The Money Grower from the Mon£yGrow£rs blog shares some insights on starting a business.

I am always impressed by people who set goals and stick to them. My own life has been less planned, in that wonderful things have happened but more by luck than design.

Some people would call it making the most of opportunities; some would call it sheer good fortune. Either way is OK with me.

In this article, I will tell you how my partner and I accidentally started a business, the ups and downs that have followed, and what I have learned along the way.

From sickness to starting a business

In mid-2003, I had a sudden and severe illness. The repercussions of the illness threw our household out of its normal equilibrium and into financial uncertainty.

Since my health was now my number one focus, I spent large chunks of time researching my condition on the Internet. One day I stumbled across a book by an expert on the subject, which I bought from Amazon. On receiving the book, I knew I had found a way to help me to help myself to get better and went on Amazon and bought all the books the doctor/author had ever written.

Inadvertently, I bought a duplicate copy of one of her books. And that was how our business started.

Instead of returning it to Amazon, I decided to see what would happen if I sold the book on Amazon as a third-party seller. Amazon allows anyone to sell books on the Amazon site and takes a cut of any books you sell.

Within two days, the book sold. Soon I had half our book shelf listed on Amazon – not because I wanted to get rid of my books, particularly, but because I was thrilled at this new way of selling.

Most of the books sold and a few didn’t.

Developing a nose for business

We started going to charity shops and car boot sales where we picked up books for between 50p and £2. Again, most sold and a few didn’t but overall we were well up.

More importantly, we were getting to know our market and refining what we bought.

After a month or so, we discovered remainder books. The best way I can explain remainder books is by giving an example: when the film Star Wars: Phantom Menace came out, the publisher had millions of books printed because they thought the film would be a blockbuster. As it happens, the film was a relative flop and no-one wanted the books so they got shipped off to the remainder warehouses. We wouldn’t touch them either – they were remaindered because no one wanted them.

Conversely, when a book goes to print for say 1,000 copies, the printer may do 1,100 copies to allow for damages. It is cheaper and more efficient for the printer to do one print run with too many books than to do an original run and then another one to compensate for damages or misprints.

Taking the case of the above example, if only five are damaged, that leaves the printer with 95 copies to get rid of – which they send to the remainder warehouse. If the book is a good title and appeals to a niche market then that is exactly what we are looking for. We are value hunters. (Or pigs snouting for truffles, if you prefer your metaphors more graphic!)

From Amazon to an eBay business

A few months later we found some huge remainder warehouses in America that had trade-only online websites. At the time the dollar/ pound exchange rate was approximately £1 = $2, which was fantastic for us as importers.

Our first order was the biggest we ever placed. However although the book prices were very reasonable, we had forgotten freight charges. The quoted freight price was more than double the price of our book order!

Luckily for us, US internal freight charges were more or less included in the book prices. My sister, quite fortuitously, lives near Boston and we had the boxes shipped to her. She then sent them to us via the surface mail, which was dirt-cheap.

Although the boxes took about two months to arrive, we started ordering every two weeks so that once the first two months had elapsed we started getting a steady delivery of boxes through.

A few months after that we started selling on eBay, too, and our earnings from the business outstripped my earnings from my day job.

This all happened within six months of that first book sale.

High rollers (of trolleys)

We were soaring high and gaining every more confidence. I decided that the packing materials we bought from shops on the High Street were a cost that added no value to our customers’ overall experience. Our customers weren’t bothered if we used a 70p envelope or a 30p envelope, as long as their purchases arrived in good condition.

The bloke at our local Post Office told us of a trade-only warehouse that supplied stationery items at wholesale prices. We go through a lot of brown tape and padded envelopes so I rang them up and asked what we needed to open an account. Unfortunately for us, they wanted trade references and headed company notepaper, neither of which we had.

So, during an unusual moment of bravado, I went down to the warehouse and began filling trolleys with heaps of padded envelopes. Padded envelopes are extremely large for their weight, and so our trolleys looked more impressive than they actually were. I banked on them not turning away our business due to our impressive looking haul.

Fortunately, those piles of padded envelopes were enough to persuade them that we were bona fide trade customers, and they signed us up with an account there and then.

There was very little downside in those early days of starting a business. But nothing in life stands still, and we soon found things became more difficult.

Risks to our eBay business

Our Amazon and eBay business does not have any real barriers to entry. Even though we do have a deep knowledge of what books are likely to sell, I am under no illusions that this knowledge can keep us ahead of the pack.

Sure enough, things gradually started to awry:

• eBay made it very easy to check what other sellers have sold. This is like having ready made market research – great for the competition but not so great for the original seller.

• One of the remainder warehouses we used decided to sell some of their books on eBay and Amazon themselves. That cut one of our supply lines.

• My partner chose not to scale our business. In hindsight, I think this was the right decision, because I think it would have been too risky.

• The dollar started to strengthen against the pound and the books we got from America were not such great value.

• The surface mail delivery option was scrapped, which meant one of our delivery lines was cut.

• If you sell on eBay and Amazon, you are somewhat at the mercy of how they choose to order their search results. Their game, their rules: like it or lump it.

• Charity shops started selling online, too, which meant a further depleted supply line for us.

Also, as the years have gone on the price we get for each book has decreased slightly. That’s natural and to be expected when there are now so many competitors in the market place, each willing to take a quid or so less than the next seller. There is nothing we can do about that, so we focus on value.

• Pricing: Sometimes we see titles that we know will sell. But we also know the prices we can sell our books for. If the price isn’t right, we walk on by. That’s hard sometimes, especially when we are short of stock.

• Patience: There have been many occasions when we’ve been quoted a price for a book title and it’s been too high for us. That’s fine because we understand that the people at the warehouse want to get the best possible price for their books, too. All of the remainder warehouses know about the Internet but their business is shifting hundreds, if not thousands, of books in one go. They are not interested in selling one-offs here and there. Occasionally, after weeks or months, they will drop their prices to levels we can work with and we will buy.

• Research! One of the things about the business we are in is that titles that are popular very rarely stay that way. At one time we did a booming trade in an autobiography about Donny Osmond. The books, which we sourced from the USA, were selling at upward of £30. But when the book was republished and the market flooded with new copies, the price plummeted.

10 tips on starting a business

This all leads me nicely onto the lessons I have learned from starting our eBay business:

1. No one except you cares if your business succeeds or fails. In the early days, you may find your family are keen for you to return to a proper job with a steady salary. (In fact, your business is unlikely to be considered a proper job until you live in a mansion and employ other people).
2. If you are onto a good thing, enjoy it while it lasts but be aware it’ll only be a matter of time before you have your imitators.
3. Change happens. Learn to embrace changes especially the changes you can’t control.
4. Being your own boss brings many rewards but it is hard work. You do everything and are everything to your business.
5. It’s easy to be motivated when things are going well. It’s when things aren’t going well that you need a backbone to stay motivated.
6. If you cannot (or don’t want to) scale up, then you must be constantly on the look out for other ways to add value or breadth to your business.
7. Network with your suppliers, customers and anyone who has a tangential connection with your business. You never know where your next opportunity will come from.
8. Learn your market, cut costs, strip out the fat or non-productive activities from your time, and provide a service that exceeds your customers’ expectations.
9. Never underestimate your costs. When we sell a book, we pay eBay fees, postage fees, tax, and packing materials. They add up.
10. Be prepared to step out of your comfort zone. If you don’t have the stomach for it, self-employment is probably not for you.

So where will we be five years after accidentally starting a business? What about ten years?

I can’t answer that. What I do know is that whatever we have, it won’t look like it does now. Just as we’ve done to-date, we’ll have to bend or else we’ll break, like a tree in the wind.

Good reads from around the Web.

The best article I read this week was from Carl Richards, writing about diversification for The New York Times.

We often hear how the years from 2000 to 2010 were terrible for investors in shares, even from me.

But in his piece, Richards points out that for a properly diversified investor, there were still good equity returns to be had:

When you view this 10-year period from the perspective of a diversified and balanced portfolio, 2000-2010 was anything but a lost decade.

Consider the following (all numbers reflect annualized returns over 10 years and include reinvested dividends):

U.S. large stocks (the S.&P. 500) = 1.4 percent
U.S. small stocks (the Russell 2000 Index) = 6.3 percent
U.S. real estate stocks (the Dow Jones US REIT index) = 10.4 percent
International stocks (MSCI EAFE Index) = 3.9 percent
Emerging markets stocks (MSCI Emerging Markets Index) = 16.2 percent

Richards suggests that an investor who wanted to be reasonably diversified ten years ago might have simply split their money between these five asset classes. Then they left to compound, without trading or rebalancing or anything else.

The return for this diversified portfolio over the ‘lost decade’ was an annualized 8.35 percent!

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