Facebook has gone public. The online world is full of news on what many dubs as “biggest Internet or technology IPO ever”. Should the average guy start shifting his investments to Facebook stocks? Should we all be jumping with excitement on the prospect of making money from Facebook? You can like all you want, in true Facebook fashion but experts say it’s not yet time to hitch your wagon to the social media giant.
What is an IPO in the first place?
IPO stands for Initial Public Offering. In simple terms, a company offering an IPO has decided to put itself at the mercy of the stock market. Meaning it is allowing the public to buy shares (or a portion) of the company. It is a way for companies to raise capital quickly and surely. In the case of Facebook, it is putting out $5B worth of equity to outside investors. The money raised will be used by the company to fund growth of their business activities.
You might say, great news you can finally buy Facebook stocks. Well, hold your horses. After the company files the IPO, the Security and Exchange Commission needs to examine its validity. It could take a few more months before the company gets listed. But even then, the average Joe still can’t just buy the stocks from the IPO. Truth is, even before they are put out there they are already promised to some big shots. There is nothing democratic about an IPO. The banks underwriting a company’s IPO gets to call the shots. They get to decide how many shares to offer, at what price and of course they will prioritize their big shot standing clients.
So when to invest, if at all?
When shares of a company have sufficiently gained value, the first takers will eventually cash in and let go of some of their shares. In Facebook’s case, shares will eventually become available. But a lot of investment experts say that as a company Facebook has no solid product to offer. Some even went to declare they would rather advise their clients to invest in other solid tech firms like Microsoft.
The moral of the story is that in any IPO, especially something as large as Facebook’s, let the dust settle first. Unless you are one of the many Facebook employees offered shares as part of compensation, there is no need to get excited. When a company goes public, it takes a little time to know what people are willing to pay for its share. It is a function of supply and demand but for a biggie like Facebook, you can expect a healthy dose of speculation thrown in.