The strategy: To work out whether I should invest in an IPO.

More jargon! Why don't you start by telling us what an IPO is? Fair enough. IPO is shorthand for Initial Public Offering - or what some of us remember as a float. It's the offer of shares in a company in preparation for its listing on the stock exchange. IPOs can be rich pickings, as the shares are often priced to attract maximum interest. If you get in through the initial offer and the stock lists at a higher price, you can make a quick profit. That's what's known as a "stag".

But not all IPOs are attractive. The desire to generate strong demand for the stock is just part of the equation. On the other side, most company owners are looking to cash-in by selling the company through an IPO. So they want to get the highest price possible. Remember Myer anyone?

This means you have to assess the value of an IPO in the same way you'd check out an existing share investment.

So how do I do that? Companies are required to issue an offer document or prospectus setting out the terms of the IPO. It will tell you how the process works, deadlines, how to apply and what the shares will cost. Many IPOs are structured so institutional investors determine the final price through a bidding process and retail shareholders are only given an indicative price range. You will usually need to apply for your shares before the institutional bidding is finalised. That means you should assume you'll be paying the maximum price and do your analysis on that basis. If you end up paying less, look on it as a bonus.

The prospectus should also set out key information about the company - what it does, who runs it, its earnings history and any earnings forecasts.

The portfolio manager at Aberdeen Asset Management, Michelle Lopez, says the fundamental research required is very similar to what you'd look for with any other share investment. But given the limited published track record of an unlisted company, it should be priced at a discount to similar, successful listed companies with a track record of operating through economic cycles.

She says investors should ask whether the company's business model is sustainable, whether it is well-managed, how it stacks up on corporate governance and about its balance sheet and cash flow. If it is being sold by private equity players, she says the company is likely to be highly geared, so be aware of how much of the IPO proceeds will be used to pay down debt. She says intangible assets need scrutiny. In some cases, brand names or goodwill may make up the entire asset base, especially if the company has been acquisitive or changed ownership in the past.

You also need to look at who is selling. Are the people who established and built up the business still involved? Are they conservative types who have grown the business from internal cash flows or are they more aggressive, with significant debts and acquisitions? Are they keeping a solid shareholding in the company post IPO? "It's always good to have management with 'skin in the game' and therefore aligned to new shareholders," Lopez says. "Many of the recent IPOs have involved private equity refloating the company. Investors need to be a bit more cautious in such cases." If the founders are selling, are there exclusivity clauses that will prevent them from setting up a new business in direct competition?

Lopez says market conditions are also important. Thanks to the spectacular gains on the sharemarket over the past nine months, the flow of IPOs is expected to accelerate in 2010. (See page 11.) On the plus side, a strengthening economy and confidence should improve the chances that quality IPOs will succeed. But it is also likely to result in some offers that are overpriced.

Is it hard to get shares in an IPO? Quality IPOs are often oversubscribed - which means not everyone will get shares or you may only get some of the shares that you applied for. Where demand exceeds the supply of shares, you can generally hope for a handy stag profit when the company lists - especially if institutional investors need to top up their holdings. The prospectus should set out the allocation process including the proportion of shares reserved for different groups of investors (such as institutional investors, people applying through brokers, retail investors and, in some cases, customers) and what will happen if the offer is oversubscribed.