FINANCIAL FOCUS ON IPOs: CALCULATED RISK OR CHANCE?

This column is prepared by Edward Jones, a stock brokerage firm headquartered in St. Louis. The company has branches throughout Missouri, including Cape Girardeau and Jackson.

Some investors regard investing in stocks as "playing the market." In fact, all stocks are not created equal. Each company that issues stocks has a unique history of growth, earnings and paying dividends. Thus, each stock offers a different level of risk as well as reward.

Blue-chip stocks are issued by the world's largest and best-known companies. These companies have established track records, including years of growth in both sales and earnings. Of course, that doesn't mean investing in these stocks presents no risk. Every stock experiences volatility. What it does mean is that if held for the long term, five years or more, history shows the odds are in your favor that your investment will grow in value.

One of the riskiest stock investments is "initial public offerings (IPOs). An IPO is a stock offered to the public for the first time. In many cases, the stock is issued by a newly established company, which makes the future of the stock very uncertain.

A case in point is Netscape Communications, a company that manufactures software for navigating Internet. When the stock was issued, it grabbed headlines across the nation. In a sign day, the stock, which was offered to institutions at $28 a share, rose to $71 per share -- one of the largest single-day gains ever recorded for a new stock. By the end of the week, however, the stock has fallen back to $58 per share.

Because of their risk and volatility, IPOs are unsuitable for many investors. If, however, you are interested in adding this type of investment to your portfolio, here area two tips to keep in mind.

-- Do your homework before investing any money. Request a copy of the company's prospectus and read it carefully. This document will provide the information you need to make an educated decision as to whether you should invest.

-- If you do invest in an IPO, invest only as much money as you can afford, both financially and psychologically, to lose.

If this sounds a bit harsh, it should. History has not been kind to new companies and the stocks they issue. Studies show that 62 percent of all businesses fail during their first five years. Extend the time frame to 20 years, and the failure rate increases to 90 percent.

Those seeking to achieve long-term goals, such as providing for a child's college education or securing a comfortable retirement, have achieved much more consistent results by choosing high-quality stock mutual funds and the individual stocks of well-established companies with proven track records of growth in sales, earnings and dividends that those who have chosen more aggressive stock investments such as IPOs.

In short, investing in a quality stock is a calculated risk that can offer handsome rewards. Investing in an aggressive stock with no established history leaves your financial future largely up to chance.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.