Alexander Wallin is the founder and CEO of SprinkleBit. An experienced investor and licensed principle (series 7, 63, 24). You can follow him on Quora here.
I have many friends selling stocks left and right to prepare for the big Facebook IPO. To them and anyone else who is considering buying in the hopes that FB will be the Apple, here are some things to think about first. Then, I added 4 investment tips that can help you succeed in general.
Facebook’s initial public offering, planned for later this month at $28 to $35 a share, presents the first opportunity for retail investors and Facebook’s 900 million members to become stakeholders.
But chances are slim that they’ll capture any of the gains that come on the first day of trading.
Why? Well, the answer is not the best new for the average Joe, because retail investors like Joe are often operating at a disadvantage from the beginning.
How, you ask? Well, the simple fact is that only institutions with connections to the underwriters of Facebook’s stock will get to buy at Facebook’s offering price, which means most retail investors will miss the first ‘pop’.
I’m going to repeat that, because it’s important:
Only institutions with connections to the underwriters will get to buy at Facebook’s offering price, which means most retail investors will miss the first ‘pop’.
According to Gerard Hoberg, associate professor of finance at the University of Maryland, “If you’re somebody who’s not wealthy and you really want to make a Facebook investment, there’s an uphill battle.”
Retail investors are usually “stuck buying in the aftermarket, and the juicy return is not so easily available.”
Facebook and its holders will sell 337.4 million shares, according to a May 3 filing, giving Facebook a valuation of $96 billion at the high-end of the range. Not since $GOOG in 2004 has an IPO received this much hype, thanks to Facebook’s everyday presence in people’s lives, along with an Academy Award-winning film about founder and Harvard University dropout, Mark Zuckerberg.
Looking for a Bargain? Think again.
Even for shareholders who get in early, Facebook won’t come at a bargain. At the high-end of the proposed valuation, Facebook is asking investors to pay 99 times earnings—a higher multiple than about 99 percent of companies in the Standard & Poor’s 500 Index. It would be more costly than every member of the S&P 500 relative to earnings except for Amazon.com Inc. and Equity Residential.
Rookie investors aiming to make a quick buck should be cautious. Investors who are unable to get in at the IPO price and buy after the run-up have historically struggled to beat the market.
For those who want to buy Facebook or any other IPO, University of Maryland’s Hoberg recommends purchasing a basket of at least five stocks for some diversification. See: Facebook IPO Update: Q&A with Smith’s Gerard Hoberg
After Facebook’s S-1 filing the amount of new brokerage accounts has risen and the inexperienced investors are the major bulk of those accounts.
As A New Investor, Here Are The 4 Things You Could Do To Succeed:
1. Place Limit Orders
If you place a market order (buying at whatever price is available) you might end up in an awkward situation where you just bought your shares at a 40% premium compared to what you were willing to pay.
With limit orders you can make certain that you don’t make a stupid mistake and spend all your funds on one stock.
So, what is a limit order?
A limit order is an order to buy or sell a stock at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. A limit order is not guaranteed to execute. A limit order can only be filled if the stock’s market price reaches the limit price. While limit orders do not guarantee execution, they help ensure that an investor does not pay more than a pre-determined price for a stock.
2. Be Rich
Among major Internet brokerage companies, only $ETFC securities unit is listed as an underwriter for Facebook’s IPO. The New York-based company is one of 33 firms that will probably get some allocation of Facebook stock for clients, though the amounts haven’t been specified.
When I say clients, it’s a 99% chance I don’t mean the average Joe, if you understand what I mean. The only clients who will have access to these allocated shares at the lucrative start price are high net worth individuals with large accounts at these firms.
3. Be Smart
You don’t have to place your order before the market opens and hope for the best as you watch the price war beating you down to a loss position. If you’re only in it for the day you should look for the bounce backs.
I am warning anyone with a weak heart that this is not the strategy for you.
IPO day-trading is one of the most volatile investment strategies an investor can use, and Facebook’s IPO will most likely be the most volatile of them all.
4. Sit Down In The Boat
Facebook is here to stay, it will not go bankrupt tomorrow. There is a reason why they have a valuation of 99 times their earnings, and that reason is they are expected to grow.
If you look at Facebook’s reach and its valuation, there is room for a lot of growth and creation of new revenue streams. As a value investor, I would stay with this stock for the long-term.
Finally, good luck and keep sprinkling your ideas!
What do you think about the Facebook IPO? Too much hype?