my mission is simple. to make you money. i'm here to level the playing field for all investors. there's always a bull market somewhere and i promise to help you find it. "mad money" starts now. hey, i'm cramer! welcome to "mad money." welcome to cramerica. other people want to make friends, i'm just trying to make you a little money. my job is not just to entertain you, but to educate and teach, so call me. every nigh i come out here and help you find stocks that will reward you be either going

higher or paying you juicy dividends or often both. but perhaps because of my four decades in the business, i sometimes leave way too much unsaid and take too much knowledge for granted. knowledge you need to know to be the best investor you can be. so tonight, i'm taking time out to impart some of that knowledge in a special show about the way stocks really work and how they interrelate or don't with the companies they stand for and are supposed to represent. on "mad money," we analyze companies, trying to figure out what makes them tick. what should we be watching for? what goals they're supposed to meet? what are expectations supposed to be? but we don't trade these companies, we invest in their stocks. and you should never forget that the company and their stock are not the same thing. i know, sounds pretty obvious, the kind of thing that should go without saying, but people constantly make the mistake of equating a company with its stock. and it's the kind of mistake that can absolutely wreck were portfolio, especially in volatile markets like these, where many stocks do trade-off on big-picture so-called

macrodata about the broader global economy, instead of what's known as the micro. macro still rules. when it's good, day go higher. when it's bad, they go lower. it's all too easy to assume that a company and its stocks are synonymous. we find this all the time. a stock gets pulverized, we assume something must be wrong with the underlying company. why else would the stock be pounded. or on the flip side, when a stock surges, we assume the company has been doing something special, something right. that's simply not how markets work, people. often, shares of a company's stock will have big moves, up or down, for reasons that have absolutely nothing to do with the underlying business. that's okay. happens all the time. and it doesn't mean the company is crazy or irrational. but what's irrational is believing there will always be a straight line, a lock step in the performance of a company and performance of a stock. there would be nomad money if there were. isn't that the way the market

should work when it isn't broken? don't we spend lots of time on the show, doing homework, analyzing companies, showing you how to figure out what makes some businesses better than others, showing you how to identify situations where companies are improving, or at least doing better than people think? i'm always telling you the most determinative of a higher stock price is increases in earnings estimates for the underlying company. that nothing correlates more strongly than the rise in share price than estimate increases. although, increasingly, i equate future success with dividend boosts of decent magnitude. so why isn't it enough? why isn't it enough just to study companies and buy the stocks of the ones that look like they have the most and can grow earnings faster than expected. why isn't it enough to invest in the home where you can close your eyes? because we can't buy companies unless you've got hundreds of millions of dollars to throw around. it's simply not an option. instead, we have to buy shares of stock in those companies. shares of stock. shares that trade on an open market, where you have lots of buyers and sellers, who might have very different motivations from you. so when you find a high-quality

company with seemingly excellent prospects, you can't just assume that the shares of the company will go higher, since you also need to take into account the stock, the way the stock trades. the way it trades in the market, up and down. don't get me wrong here. over the long haul, the best way to pick winning stocks is by identifying winning companies. onces that are growing faster than anyone expects or vastly increases their dividends, or are improving dramatically. i mean, i'm not changing my mantra one bit. that is still the way to go. but, lots of times you call me on a day-to-day basis, it doesn't work. these stocks on a day-to-day basis can trade wildly with no relation to what's happening at the company and those movements can be confounding, so confounding that you sell low or buy high or give up entirely. and you know i think you need to stay in the game if you're going to augment that paycheck and save money for retirement, for vacation, for tuition, all the necessities of life. if you assume that every move in the stock market makes sense, you're going to end up passing

up some incredible opportunities to buy merchandise that's been marked down for irrational reasons, and you know what, you'll miss when you should sell stocks that are run up too much, courtesy of market mechanics. z >> sell, sell, sell. >> rather than anything related to the company. in recent years, we've witnessed the rise of a ton of factors that can cause a stock's performance to differ even more radically than the performance of the underlying company. at least in the near-term. over the long-term, of course, you know, they do tend to converge, but over days, weeks, maybe even months, you have all sorts of things that can make the stock of an improving company fall, or the stock of a deteriorating company rise. these days, many investors say you use exchange traded funds, etfs, to get exposure to entire sectors. some of these etfs allow them to buy or sell with a ton of leverage, giving them triple or double the buying power of the bank. this proliferation of etfs means that some stocks in the sector can trade in lockstep with each

other. the good moving in complete tandem with the bad, and a business sector has always been an important determinant of a stock's performance. if a stock is a house, then it's sector is the neighbor. and nobody needs a good house in a lousy neighborhood. >> the house of pain. >> the house of pleasure. >> but these days, the influence of these etfs has been, for those of us trying to discern the wheat from the chaff, and have made this sector more important than ever when it comes to the day-to-day action in the stock, too important. plus, you have the high-frequency traders who can hijack an entire market, causing massive across-the-board moves that make no sense from the fundamental -- from the perspective of the fundamentals, especially at moments of extreme volatility. these new waves all distort the stock-picking beaches we know from the crash and other short-term blips down. and when times get tough for

companies, they can get much tougher for their stocks. i talked about forced selling, the idea that stocks can get slammed just because hedge fund owners are in trouble, and they desperately need to sell, sell, sell in order to raise cash. you see this when a bunch of hedge funds make the same bet. you saw it in the banks a couple years ago, saw it in gold recently. and if things don't go their way, things will bet heavily on euro zone. they didn't have to sell their european assets. they had to sell everything -- had to sell totally unrelated stocks too because they got hurt so bad. especially if they're investors were clamoring to get their money back. by the way, this is exactly what happened when we crashed in 2008 and 2009, when selling began forced selling, which ultimately took most stocks down to absurdly cheap levels, back at that generational low in march of 2009. the reverse happened in 2012. when those who bet against european stocks, almost all stocks, but particularly the financials, had their heads handed to them when the european

central bank put their foots down on the short seller's nexts and made money all over the place. the bank stocks soared. it didn't matter whether it was a bank was solvent or insolvent. they all flew up together. i know that you probably have never shorted a stock. but in an investing world that is now dominated by hedge funds, most of which have to make bets for and against whole stocks and whole markets every day, their influence must be taken to account when we try to figure out how a stock can different from the company underneath. when lots of shorts pile into a stock and then get hit with some unexpected piece of good news from the company, you can get what's known as a short squeeze, that propels the stock to the absurd heights some short sellers have to buy to admit defeat. a lot of people feel that's what happened to tesla, okay, that elon musk company. remember, the market is, well, a market. which means it's dominated by supply and demand. so when there's not enough supply of a given stock or kind of stock to satisfy that demand,

you could see a stock rise beyond what you'd expect, based on the fundamentals of the companies. and when there's too much supply of stock relative to demand, then shares get hammered, well beyond where you might have thought they could go. we saw a lot of this with the super hot areas like the chinese internet ipos in 2010 and 2011. at first these deals were staggering. they give you this incredible performance. everyone got so excited, they just wanted nothing but china! but the games became smaller and smaller and smaller as we got more and more chinese dot coms coming public. ultimately, they flooded the market with their supply, the same thing that happened, by the way, at the end of our dot-com boom more than a decade -- remember, at the turn of the century. and with the deluge of social media ipos in 2011 and 2012, we saw it again. in the end, no chinese deal was worth participating as the supply was way too heavy and demand yay oversaturated. this is one of the reasons why the chinese ipos reached their lowest level in a dade.

80% decline from 2011, 90% decline in 2010. and the buyers of the last social media out of the chute, as we call it, the groupons and zyngas, they were crushed by waves of insider bailing, seemingly at any price imaginable. super hot stocks became super cold ones, simply because the public was first fascinated and then turned on them with a vengeance that i haven't seen since 2001. of course, the fundamentals were never any good to begin, but, boy, did they have buzz. so the bottom line, recognize that's what's happening with your stocks doesn't necessarily reflect what's going on with the jrnd lying business. and when a company that's in terrific shape sees their stocks smashed, that could be an amazing buying opportunity. just remember that it can sometimes take a long time for the action in a stock to sync up with the performance of a company it represents a tiny piece of. that way you won't be frustrated with what you thought should happen immediately after you heard fabulous news, and instead

you can wait until the market gets smart and reward your stock with the move it deserves. let's go to dave in virginia, please. dave? >> caller: yes, how are you today, jim? >> i'm real good, dave. how about you? >> caller: i'm doing real well. i had a question for you about after-market trading. i was curious what exactly is it? who gets to participate in it? and what are the ups and downs of it? >> okay. anybody can participate. i mean, if you have a broker that allows you to buy and sell, the market doesn't really close anymore at 4:00. there's bids and there are offers. i don't like it. i don't like it because it's unregulated, so to speak. there's not really a lot of depth to the market. you can end up buying something too high and selling it too low. i don't encourage it. i encourage homework, no snap judgments. stay away. jay in texas. jay? >> caller: hey, boo-yah, jim! >> boo-yah. >> caller: from south texas. >> how are you? >> caller: just fine, thank you. question i have for you, jim is, if there's some distribution in

the stock throughout the day, meaning more sellers than buyers, how is it many times the stock can defy gravity and close up for the day? >> well, i mean, the sellers do sometimes complete and while the sellers are selling, buyers are -- buyers get lined up by brokers who say, listen, i've got a big seller, i've got a big seller. what happens is the stock goes down, and then when the final piece trades, all these buyers converge, and then they end up overwhelming that last piece and the stock goes higher. that's what happens time and time again. look, sometimes the stock's performance doesn't match the company's underlying business. i know that can shock you. and it can take a while for the two to sync up. but if you get a bargain, please, be patient. wait. your words will beckon. "mad money" will be right back. >> announcer: don't miss a second of "mad money." follow @jimcramer on twitter. have a question? tweet cramer, #madtweets.

send jim an e-mail to m madmoney@cnbc.com or give us a call at 1-800-743-cnbc. miss something, head to madmoney@cnbc.com. ♪ [ male announcer ] you wait all year for summer. ♪ this summer was definitely worth the wait. ♪ summer's best event from cadillac. let summer try and pass you by. lease this cadillac srx for around $369 per month or purchase for 0% apr for 60 months. come in now for the best offers

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welcome back to tonight's special edition of "mad money," where i'm trying to explain what really moves stocks. now, they often diverge from the fundamentals of the companies they purport to represent. i know this is something that confuses you mightily. i read your e-mail, i see it, jim cramer on twitter, i know this bothers you. you need to know a little more about the trader who is drive stocks in different directions and you need to watch short-term moves in stock prices. but to take advantage of them, rather than pretending like so many pundits do, that these short-term gyrations in stock prices are beneath their notice and will somehow pollute your gains. may we never be so self-important or arrogant around here, as to think that entry and exit points don't matter. they often control the ability to outperform the market, they

certainly control how much money we make, they affect our profit margins. we care more about rices at the supermarket sometimes than we do about the prices of the stocks we buy. that's plain wrong! how do we square the idea that when you buy a stock, its price can become unglued from the underlying fundamentals about the company. the facts about the business, my insisten insistence, how do you balance that with my insistence you always do your homework and keep track of the fundamentals by listening to quarterly conference calls and the myriad of information on the web to keep current with the company. you think stock prices will just bounce around anyway, if they're offered at the mercy of macroeconomic factors. or if their stock will be held hostage like big institutions like hedge funds that trade them, why am i giving you this relentless focus on learning, learning as much as you can about the underlying company. why, especially given that homework by far is the most onerous and least interesting

part of the process of the process. the reason we focus on the fundamentals is just about anyone who tries to understand them can actually do it. a lot of it's arithmetic. the information is all public and all readily available. in short, why you may think the homework is tedious and boring, it's also easy compared to trying to predict so much of what's out there that is unknowable. investors are always looking for an edge, looking for a leg up that provides them with an advantage over everybody else. that will never change. not all advantages are of the same scale. but by following my standard homework regimen, you should have a edge over most the other people who trade the stocks you follow. how on earth is that possible? your homework involves looking at publicly available information. anyone can check it out. according to most economists and some armchair investors, the very fact the information is out there means it should already be baked in into the stock. many of the share prices should reflect what you know from your research, but we know that's just not how the market really works. lots of people are real lazy.

lots of money managers are in addition technicians, which means they don't get down into the nitty-gritty of the quarterly earnings conference calls if you keep up with this information, you'll know more about a stock than most of the professionals do. although they'll never admit that. and if that's not an edge, i don't know what it is. homework is about taking control of your financial desdestiny, eliminating as much emotion as possible. i know i'll get results. the very objective kind doesn't fall prey to fears about a fiscal cliff, a sequester to your stock worries, or a federal reserve minutes that don't mean a thing to your position. maybe the homework will always give you that much of an edge. won't give you enough information to tell you which direction a stock will ultimately head. maybe it won't protect you from the whims of the children in washington, d.c., who play with the economy willy-nilly, or the debt issue that's always going to be affecting any number of rogue nations in europe or our own company. but learning about companies

isn't an all or nothing proposition. i don't think familiarizing yourself with a company should ever be dismissed as less than useful just because it doesn't immediately translate into immediate profit. and ultimately, as i said at the top of this special show, stocks do tend to drift back into line with where they deserve. they do sink, ultimately. given how the underlying company's are doing. so in addition to knowing a lot of pertinent things about a business, you can also assume that your stock will probably end up within a certain price range, but you've got to wait long, got to let it percolate. on top of that, as long as you keep up with the homework, you have a good, clean way of deciding whether or not to cut your losses in a stock that isn't working. and that's an incredibly valuable tool. especially when you're trying to claw your way back, if your stock went down because of a typical market sell-off. you need to know enough to figure out whether you should perhaps be a buyer if nothing's going wrong with a company. you need to know whether opportunity's really knocking, or is your head about to be knocked into a canvas.

and on the other hand, it will give you the conviction to stay in a good stock that's been hammered by the market for wrong reasons. either way, you will always know why you're buying or selling something. you won't be beholden to anyone but yourself when it comes to your investing decisions. and you can just think over time, how many stocks have dropped, you know, just because of a quick decline, and you wished you had bought them, but you didn't know the fundamentals, so you couldn't. the better you are at avoiding stocks with a risk/reward that is changing from bad to good or good to bad, the better positions you're going to be able to make. you'll be able to make more calculated, intelligent risks and be more aggressive with your investments. these skills are useful no matter what, but they are of paramount importance when it comes to investing in stocks. the difference between needing to risk your capital and risking that capital in order to make money. but even though these skills are handy, they aren't what most people would call compelling and they may not give you the total picture you may need to get as to where you need to go.

and as for the boredom factor, let me take care of that. i spent years trying to make investing more interesting. no sin given that so many will focus on scaring you out of your shoes. and i think i've shown i will do anything to keep investors engaged in their money. i've come out on the set and film while wearing a hazmat suit, to compare hasbro to mattel. driven on to my set on a lawn mower to intrigue you to lack into john deere. i can't figure out how many dollars worth of expensive giz mos i've recked. i've shed blood on the set to try to show you the inside of a boeing, and chipped my tooth. and i also ate pepperoni dog food and threw up on the set soon after the show concluded. so i am not concerned that too many of you will skip the homework because you lack the proper motivation, interest, or

enthusiasm. believe me, i will make this stuff entertaining for you no matter what. we have ways of making you motivated. the bottom line is, it is important for you to know why you're doing all this work, what the point is. it's is a way for you to build conviction in your stocks. it's a way to get an edge, one that's totally league, even in the most volatile or calm of markets. in an era where so many panic at the sight of the president coming up to a podium or the speaker of a house giving a press conference, you need to know that it might be a buying opportunity and not just a selling one like the panicers all around you. [ male announcer ] come to the lexus

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...to stop, spot, and report fraud. you can help. guard your medicare card. don't give out your card number over the phone. call to report any suspected fraud. we're cracking down on medicare fraud. let's make medicare stronger for all of us. i want to tell you about a tool that can help you make money quickly. but also carries a certain amount of risk and can be trouble if you don't know what you're doing. investing in initial public offerings, ipos. it's impossible to ignore the

ipo opportunities that have presented themselves in the last couple of years. there's been so many deals, including many that have gone to a premium and are red hot from the moment they are born. and others that fizzle from the opening bell. these are led, in particular, by technology and social media names, which have been met with exceptional hype and not enough skepticism. hype doesn't even begin to describe the buzz, almost hysteria around that facebook ipo. that was hyper hype, for a company that indeed has some excellent long-term prospects. sure, ipos are sexy. they are talked and written about endlessly. but you're hardly ever told what to do with them. i'll teach you the basics right now. because when you know how to tell the difference between an about to be public company that could soar and one that could go down in flames, you will then have the potential to rake in some serious profits. the lure of ipos is that when you nail it, when you get in on the right one, you know what, you can have gains of 20, 30, even 100% in a day, in a few

minutes' time. the instantaneous nature of these profits makes them incredibly attractive, but they can also often get in the way of your better judgment and cause you to invest in initial public offerings that end up stinking up the room. as helpful as those profits can be, don't let the brokers trick you into believing that buying every ipo is a great way to make money and the real challenge is just making sure he can always finagle you some shares. wrong, wrong, wrong. in fact, some ipos aren't worth investing worth in all. the investment bankers will always try to slip in some clunkers. partially because of the performance of newly public offerings tends to be all over the map, especially their first day of trading, and partially because there isn't that much available information about ipos, beyond that prospectus that very few people read, there is a tendency to assume that the success or failure of a given ipo is mostly a question of luck, and that is often wrong. i think you try to figure out which ipos to write off as

uninvestable and which ones deserve to be bought. you can separate the ipo wheat from the chaff. it isn't about luck, it's about analysis. the kind of homework that professional money makers do all the time and the kind i advocate tirelessly on the show. i would analyze stocks back the same way at my old hedge fund and that's the way i still do it. i made a boat load of money a for myself and for my clients at my old hedge fund for investing in ipos. i think the investment banks that underwrite all these deals have their own agenda. one that i believe is often as much about bringing people, regular people, regular retail investors, like you, back into the game, as it is about helping their clients raise money in the equity markets. one of the things i learned on my many years at wall street, both hawking stocks and bonds at goldman sachs, and for myself and for the rich people in my hedge fund, when the market turns south, when it becomes really difficult to make money, and people start pulling out the money from stocks all together, you know what those brokers like

to do? they like to throw investors some easy wins, some layup ipos that are intentionally underpraised so they will pop when the shares start trading. why do i think they would underprice the deal and short change their investment banking clients, because it's just as important to the brokers that their other clients, the ones that pay them commission, keep them interested in the market. and for most investors, the gains from a sweet, underpriced ipo, or offerings with a small float that boosts chairs are a great reason to feel good about being in the stock market, about owning stocks, about buying stocks. when times are tough, the brokers want to entice you back into the stock market. hey, come on, that makes a lot of sense, right? they've got to find out ways, because their business depends on you buying and the investor selling. and by the way, the companies don't mind this, as long as not too much stock is given way too low. so for the anatomy of ipos that fit this pattern, i need you to look at linkedin, and groupon, which priced in 2011 and rose 109% and 31% respectively in

their first day of trading. there's no doubt that these offers signaled talks about a bubble if internet stocks, but there was also no doubt that the issue was the artificial way that they were priced, putting out very little stock, a sliver, knowing that it would cause a big pop, and creating a bubble all by itself. the brokers few these stocks would be hot, in part because of the valuations floating around for social media and hype for the group. they also knew that if they offered a limited number of shares and set the pricing below the hyped valuation levels, demand would overwhelm supply. even though these were well-known companies, the brokers tightly controlled the supply, parand gave out just enh to the large mutual funds that they would be able to start, but not finish, their outsized positions. that's way the mutual fund appetites would be whetted, they would come into the secondary market, the regular stock market after the stock opens, and bid, bid linkedin up and get the rest of their positions in, and that's why linkedin kept soaring. never forget that the trick to a successful ipo is this rationing

process. this syndicate desk, they're the ones that allocate the stocks to potential shareholders, they know how much the big mutual funds ultimately need to be able to have enough linked in to impact their own performance. so what the syndicate desk does is they give them a percentage, usually about a third, sometimes half of what they need to own, what is known as half of a full position, and that forces the client's hands to complete the size of that position in the open market. now, of course, they could flip the position themselves. but brokers have ways to monitor who takes that quick money. and they may not be allowed to get big allocations the next time around. you benefit, though, because the syndicate desk almost always saves some stock for retail investors, as the brokers know that retail investors are more likely to hold on to stock and not play that flipper game. you know what, i am actually indifferent as to whether you do either. my goal, try to help you make money. the one thing i don't think you should do, though, ever, is go into the aftermarket and buy stock. we're going to miss some opportunities, but that's okay. listen to me. i don't want you to go into the aftermarket, meaning i don't

want you to buy the new ipo in the aftermarket after it started trading, particularly at inflated valuation levels. just forget about it. i've got staggering statistics that show you almost always a sure loser if you buy a hot stock after trades, most just gigantic losers that could destroy your nest egg. sure, luninkedin, total long-te winner. but groupon still remains in the doghouse, as do so many of the shooting stars of that now bygone era. the odds favor losing and not making money in aftermarket investing in ipos. you have to trust me on that. i've done the work. you are in a much better position than that of a mutual fund. you don't have to buy a lot of stock, you can pick and choose provided you do enough business with a full-service broker. in the after-market, wait until you get a reasonable entry price, right, and then performance details before coming in, okay? like with facebook in the fall of 2012. when everyone feared that there would be a ton of insider selling, just at the time when the company got religion about

going mobile, that was the time to buy, not sell, as the weakest hands were already gone, knowledgeable people jumped this to do some buying. here's the bottom line. ipos can be a great way to make mad money, but if you are not in the know, it can be a very treacherous path. so keep these ipo mechanics in mind, and remember that the big guys do not necessarily have you, the home gamer, in mind. so beware and trust me. never, ever buy in the aftermarket. for every one winner, there are ten losers. don't be a sucker. stay with cramer. yeah, i'm married. does it matter? you'd do that for me? really? yeah, i'd like that. who are you talking to? uh, it's jake from state farm. sounds like a really good deal. jake from state farm at three in the morning.

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the repairs are guaranteed for life. so call... to talk with an insurance expert about everything that comes standard with our base auto policy. and if you switch, you could save up to $423. liberty mutual insurance -- responsibility. what's your policy? dealing with ipos can be difficult and dangerous. because the prospect of instant gains is so enticing, the euphoria can cloud your better judgment. as everyone who got in on the aborted facebook deal knows all too well. that's why you need a consistent method to make sure you don't get torn to pieces by something that you don't understand. a deal you can't fathom, or make heads or tails of. so here's your primer on analyzing smoking hot deals and

ice-cold deals, the safer and the dangerous. the first and most important thing i look for with an ipo isn't what the company does, believe it or not, it's the company pedigree. yes, the bloodlines. i care about who the executives are, who the investors, but most important, who the brokers doing the deals are. the first cohort, the managers, can often be a relatively unknown group of people. strangely, it's the least important part of the pedigree, education. here's why. it's very interesting. many of the best deals represent technology companies, including social media, and those companies revolve around an invention, much more than a management team. look, if you just looked at google's management team, for example, you would have avoided this ipo like the plague. i mean, think about it, who the heck were larry paige and sergey brint? they were a couple of 20-something wild men. that's not particularly encouraging, is it? but those relative new kids on the politic have proven

themselves and bet on the new, young innovators is that they will too. do you know more about mark zuckerberg, other than he wore a hoodie? my second check, who are the investors? more of a negative check, a disqualifier, if you will, than a positive one. when looking at the investors in the company that's coming public, i'm concerned about you getting caught up in another kind of investment, one that is funded by private equity companies that are simply anxious to cash in on a better market. private equity firms like blackstone, cerberus, they have bought dozen of companies in the last few years. in many cases, they paid far too much for them. they badly need to off-load these companies in what's known as the open market, so they can get them off the books. some of them will barely be profitable, others will be stinkers that the brokers will try to entice you to pick up, a hope that a rising tide can lift all boats. the way i see it, these private equity ipos, almost as a rule, are difficult to judge. i'm not being that pejorative, some will work, but they're difficult. and this brings up another important aspect of analyzing

ipos, recognize that just because a company can be publicly traded, that doesn't mean it can't be a piece of junk. there are plenty of publicly traded companies that qualify as a travesty, a mockery, a sham. some of the smaller social media names fit this category. the regulators don't have a mandate to judge the quality of the business of ipos, they make companies disclose as many facts and financials as possible, so you can judge yourself as home. and the brokers, at least when they're dealing with the private equity firms, they've got a bit of a conflict going there, because they do so much business with these outfits that they're hard to say no to. the broker's house get immense amount of money from private equity firms when they take a company private, and even more fees when they're spun off. includinging large fees for the fixed income fees. they refinance like you do at home. that's why the investment bankers will bend over backwards. so if you see that private

equity firms are main investors in companies coming public, let's call it a yellow flag. it would be a red flag if there's been a lot of bad deals. and third, i always look at the brokerage houses bringing the deal. this is really important. i want them to be major firms, yes, you may not like them, but along the lines of a morgan stanley, a goldman sachs, a credit swooiuisse, a jpmorgan. why does this matter? i know you don't believe me, but these firms have their reputation on the line with that view. and that makes them less likely to bring a clunker public just for the fees. you can take the brokerage name underwriting the deal as a fairly good seal of approval for the enterprise. don't be all that jaded, people. i know many are, and it's wrong. why do i think this? let me tell you a story. in the 1980s, as a young broker at the goldman sachs, i had personally helped work with the finances of a young company started by some brilliant

inventors out of m.i.t., called the thinking machines. they claimed they had the fastest computer in the land. i remember dow jones used it, it was so good for their back office and stuff. i had done so much work with the principles that when they decided to bring the company public, i was actually able to convince them to use goldman sachs as their deal manager. it was a big plum. there was only one problem. i couldn't convince goldman sachs to put its name on the deal, despite the immense fees that an ipo brings to a firm. the analyst at the time that followed the company for goldman sac sachs, he pored over the financials, he looked at the product and he made a judgment. he made a judgment that the company, while having short-term momentum, most definitely, would not have my staying power. i was aghast. oh, man, i was looking at a big payday. i stood to make a big six-figure ticket to bringing the deal to goldman sachs. this analyst, though, he simply wouldn't budge!

reminding me that this was goldman sachs, not some sclop firmed that put its name on any company just because it was hot. sure enough, we passed. and a couple years, the company failed. a victim of better technology and poor financial management. >> the house of pain. >> so take it from me, that's why the broker's pedigree matters and i would pass on deals done by firms that you have never heard of or have little or no track record with successful underwriting. doesn't mean that all ipo brought by goldman sachs would be a success, far from it. but in the heyday of social media, just like with the dot coms at the turn of the century, every firm, good and bad, got caught up. so there are never any assurances in an overheated market, but checking the names behind a deal remains integral to a good ipo. now, look, nothing's perfect. that's why i have a checklist. hopefully one of these will flag you. here's the bottom line. only after i've gone through that three-step vetting process would i then actually consider what the company does.

or what it makes. who how it has done in the past. in part because it's so difficult to judge these issues. and i would rather use the quick filter i just went through before i even cracked the books on a company. something i'll teach you how to do after the break. [ male announcer ] it's time. time to have new experiences with a familiar keyboard. to update our status without opening an app. to have all our messages in one place. to browse... and share...

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we've reached the final step. how to analyze the actual company that's coming public. here you have to assess what the company makes. you have to ask if it's profitable. and post important, if you're thinking about hanging on to the stock after the deal, you need to know how big its end markets are. that's so crucial. this isn't all that different from analyzing any other stock, except you have less information to go on. most of it's coming from the prospectus, figuring out what the company does can be pretty easy if it's got a big brand or consumer products business, say under armour or crocs. but it can be very difficult to figure out what the darned company makes if it involves a sophisticated product, especially with technology. these technology companies, like

those ones connected with broadband or optimization or wide area networking, semiconductor, hey, no wonder warren buffett says, don't go there. if a company is making -- that's coming public makes a consumer product, first you've got to ask yourself, is it a product you like? this isn't the only question, but it does matter. take the ipo years back, a thing call eed heelies, a shoe with wheels on it. that is a product i absolutely despise. i predicted it would jump when it came quickly, but then get out quickly. it popped to the 30s, and then began a long decline that took it to as low as a dollar and change a few years ago. on the other hand, when the company has a good product, one you like, when it's already profitable and many ipos aren't and has solid financials, then you can catch both the gains from the first day, the initial public pop, and then from an extended run afterwards. and that's what happened with the under armour, ua, ipo. that was a truly mouth watering

deal where i knew the steak matched the sizzle. on the first day it popped from 12 to 25, but i urged people to take hang on after taking some profits, even at that higher price, under armour was being valued the same as nike, even though it had a much higher growth rate. that's a classic example of stock market mispricing that worked to your example. once in a while, you get a thrice blessed ipo, a lot of room to run and a great brokage house sponsoring it. lululemon is a great example. goldman sachs brought public at $18 in 2007. it's continued to grow because of the gigantic market that was initially just women who performed yoga, but now has extended to all women, not even just women athletes, and some men too. some of the best ones from 2012 to think about, organic foodmakers annie's, discount youth retailer, five below, fibe, an enterprise software,

guide wire, and they all fit the three-prong test. in all of these cases, the trick is to recognize the size of the market, the power of the competitors, and try to figure out how the company is coming public versus value and similar players. deals like under armour or lululemon which are priced at significant discounts to their peers when you factor in the growth rates, they tend to be the good ones, but are rare indeed. the bottom line, to analyze an ipo, including the abstruse technology companies, you want to look at the addressable market, the competitors, the historic growth rate of the company, versus the growth rate of the market itself, see whether the growth rate is profitable, make sure of the brokerage's pedigree, and then you'll know whether it's worth it to put in for the deal. "mad money" is back after the break.

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call... and ask an insurance expert about all our benefits today, like our 24/7 support and service, because at liberty mutual insurance, we believe our customers do their best out there in the world, so we do everything we can to be there for them when they need us. plus, you could save hundreds when you switch, up to $423. call... today. liberty mutual insurance -- responsibility. what's your policy? well, cramerica, it's time for your tweets. first from @clarkevans3, who writes the following, "why don't more companies split the stock?"

you are so on point here, clark, i've got to tell you. one of the great things about some of the stocks i follow, when they do split the stock, like a sales force.com, you get a lot of liquidity. it makes it so the stock doesn't trade so herky jerky. coca-cola likes to split the stock. the companies that get to $300, $400, they think they've got berkshire hathaway. i think she should split it. it doesn't create any value, but it does make it to individuals are much less scared of a stock. and maybe that's enough. no value created, but very pro-retail. and here's one fro from @tswizelwizzel who writes, advice for a young person, who's the best strategy to go about informsing small amounts at a time? quantity or value? i like to pick stocks that are below ten for my first stock, and buy five shares. that way i get to feel the pain if it goes down, i can always buy a little more if it goes down, and it's easier. only later do i start getti tinp

to stocks, i know it shouldn't even matter what the dollar amount is, but i know the way you think. i know you don't think like a yale professor who's trying to analyze stocks, you think like i did when i started. you want a little bit of capital, to be able to buy five shares, that's the way to play it. another tweet fr from @harrisonfresh. and this one says, "diversified amongst asset classes or with just stocks. which should i be most concerned with? boo-yah, nor cal." ho okay, here's what i care about. i care about baskets. it can be etfs or individual stocks. but you have to think about what they do. i care about the end market. that's why i do diversification. if everybody's end market has to do with finance, or everybody's end market has to do with technology, then you end up being hurt. so consider who the customer is, if you're unsure about whether they're diversified. the next tweet comes to us from p. gallagher 3115.

"what's the best investment book you've read?" "beat the street," peter lynch books, really terrific and i think they're great places to get started. let's go to one fro from @j.e.hamilton. "how many hours do you sleep each night?" i tend to get about three or four hours of sleep every night, except for friday night and saturday night, write get about twice that. i believe you actually save up the sleep. if you get a lot of sleep on saturday night, you don't need to get a lot on sunday or monday and i don't. another great tweet comes from @104, who writes, "boo-yah, jim. just finished your book "you got screwed." great book. it's just as relevant today as when you wrote it. i thought that book would be popular, a lot of people didn't like the title. i will say this. it was spot-on about hour wall street sometimes can really stab you right in the face, as well as the back. "mad money" is back after the break. i'm beth...

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i like to say, there's always a bull market somewhere and i promise to try to find it just for you, right here on "mad money." i'm jim cramer. see you tomorrow! tomorrow! a revolutionary change in the newspaper business happening before our eyes. prices are crashing, and yeah, the digital shift is changing. but you know what? these big papers were too liberal in their content too often, paying no attention to their center-right readers. and we'll see if jeff bezos can change that with his new "washington post." another week, another so-called major speech from president obama. he says he's ending fannie mae and freddie mac. but i see at least one if not two new government insurance plans. is anything really changing here besides