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5 things average investors should know
- Updated: May 17, 2012 - 8:44 PM
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Facebook Inc. is certain to make a dramatic entrance to the stock market Friday with its hotly awaited initial public offering. What's less certain is whether you should buy the stock.
1 A matter of access: The problem for amateur investors is that only a handful of them will be lucky or connected enough to scoop up the stock in the company's oversubscribed initial public offering. Most shares will go to big institutional investors or wealthy brokerage customers on Thursday instead of to retail investors. As in all coveted deals, most people will have to wait until trading begins -- on Friday on the Nasdaq exchange --to buy. That brings us to the next issue: Price.
2 First day inflation: The mania means Facebook shares will almost certainly rise Friday, the one-day pop that is common for Internet offerings. Overflowing investor demand prompted Facebook this week to raise its expected price range to between $34 and $38, from the previous $28 to $35. While investors are generally willing to pay about $14 for every dollar of profit from the average company, people buying Facebook are paying about $100 for each dollar of profit it made in the last year.
3 Smart money vs. dumb money: New investors, in part, are buying their shares from current owners. Insiders and other professionals (such as Goldman Sachs and PayPal co-founder Peter Thiel) who snagged the cheaper IPO price are more than happy to "flip" their shares for a quick profit -- a classic case of Wall Street "smart money" selling out to Main Street "dumb money." But as the momentum gives way, small investors can be saddled with bruising losses.
4 How long should you wait? Rather than jumping in now, small investors may be better off waiting until the hype subsides, experts say. Said James Krapfel, an IPO analyst at Morningstar, "It's usually best to wait a few weeks to let the excitement wear off. Buying in the first day is not generally a good strategy for making money." Analysts predict the stock price will reach between $44 and $49 in the next 12 months -- although that might not be saying much if the stock surges Friday.
5 Could it pay off? Facebook marks the culmination of a string of social media IPOs in the last year -- several of which (LinkedIn, Groupon, Zynga) have stumbled. But there are exceptions. Google, for instance, started rising on its first day and almost never looked back. Facebook may be able to justify its premiums if it can keep expanding its profit at the pace it did last year ($3.7 billion in revenue, $1 billion in profit.) It's a feat that some analysts say is possible.
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