An Unconventional Guide to Paying for College

The Facebook IPO – What It Means For You

facebook ipo

With over 600 million users, Facebook has become one of the most recognizable brands around the world. Facebook has changed the way that we interact with our friends, it has changed how we advertise, and it has changed how the world gets its news. Facebook is also about to make a lot of people very rich.

Speculation has swirled for years now on the timing of Facebook’s initial public offering (IPO). This is the official step that Facebook will take to become a publicly traded company. They will issue a set amount of private stock in their company for sale or trade in the open market. According to the recent announcement, Facebook is being valued at roughly $100 Billion going into their IPO.

Facebook Employees Get Rich

Facebook employees, as with most startup companies, were issued stock in the company as part of their compensation package. This part-ownership in the company has meant that for many years Facebook employees have actually owned shares of their employer. Because Facebook has become such a sought after company, Facebook employees have actually gone to secondary markets to sell their private stock for real money.

Secondary market site Sharespost, has been trading Facebook shares for years. This has allowed investors like you and me to buy stock in a private company. This is always a gamble, as there is no way to sell this stock unless you sell it back through the secondary market, or the company has an IPO, and the initial stock price is at or above the price you paid on the secondary market.

The current valuation of Facebook stock prices means that private shareholders could stand to see their share prices roughly double at what they are currently trading for on the secondary markets.

All of the Facebook employees who have sold their private stock in the secondary market over the last few years may very well be crying when the Facebook IPO actually happens.

Many Facebook employees who own thousands of shares of their company stand to become millionaires in one day when their shares are valued on the open market.

How Do We Get In On The Action?

Short answer?

Sadly you can’t…

Currently the only way to purchase Facebook shares is through a secondary market, and the private investors who buy and sell in that market usually do so with large sums of money; generally starting at $50,000 or more. Granted, you may be willing to risk an investment of that magnitude on this investment, but there is then the issue of supply and demand. When an IPO in it’s sights, nobody who owns private Facebook stock will be willing to sell. They see a big pay day in their future and are holding onto their stock in anticipation of the IPO.

Ok, so if I cannot buy through the secondary market, I will buy on the day the IPO hits!

Makes sense to me too, but unfortunately, this is not an option for the average investor either.

Because of the size and magnitude of the Facebook IPO, large banks such as Morgan Stanley will completely control the IPO. This means that only investors who use their brokerage firm will have access to Facebook shares. Even if you have an account with Morgan Stanley, you will need to be in the top tier of investors (likely with millions at your investing disposal) to even be offered Facebook shares. In one of the most hotly anticipated IPO’s in recent history, you can bet that the bidding war will be fierce, and Facebook stock will skyrocket on the day it is offered.

Stick to the “Get Rich Slowly” Method

Our friend JD, over at Get Rich Slowly has long preached the wisdom in index fund and dollar cost averaging. Sure, investing in the Facebook IPO is sexy and you could stand to make a lot of money. However, what if the stock tanks the day after the IPO? You could also lose a ton of money!

Investing for the long term is the key to real wealth accumulation.

I highly recommend investing in index funds which match the movement of the overall stock market, and are very low cost. Also, steady investing over time will let you take advantage of dollar cost averaging and ensure that you do not get suckered into buying high and selling low.

The path to true riches may lie in the Facebook IPO for a select few of us, but for the majority, stick with index funds and building wealth over time and you will sleep much better at night!

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16 Comments

  1. Like most IPOs FB will most likely pop as soon as trading opens and then fall as the early investors dump their shares. If you want a piece of FB you’ll most likely be better off if you wait until the hype of the IPO dies down.
    Jeremy @ Personal Finance Whiz recently posted..Save Money on Essential Items With Price Comparison WebsitesMy Profile

  2. I’m not even sure I’d get in on this even if I did have the cash – Not sure about the long term prospects.
    Jeff @ Sustainable Life Blog recently posted..Hurdles on the way to the GoalMy Profile

  3. Amen, said the choir. I think it’s best to run from this kind of thing…
    AverageJoe recently posted..When Charts & Graphs LieMy Profile

  4. Sound advice! Whatever can earn you a lot of money in the short term, can also lose you a lot of money just as quickly. It’s all about the tolerance to risk, but I’ve always been a fan of long term investments. Michael
    Michael recently posted..Basement Mold RemovalMy Profile

    • @Michael — You hit the nail on the head. I guarantee you will sleep better at night too, knowing that you’re investments don’t depend on the whims of the market and one company’s success.

  5. Was about to start working for Facebook a few years ago…Oh, well…maybe next time! Sticking to index funds for now
    Susane recently posted..Phlebotomy Certification TrainingMy Profile

    • @Susane — I imagine that would have been a sweet gig, and you could potentially have a huge payday in your future. But you are right, index funds are the way to go!

  6. I fully concur with the recommendation to go for index funds when you invest in the stock market. You must be a real genius if you can decide at what time the market undervalues or overvalues an individual stock like Facebook. Afterwards it is always easy to see. But few can make this analysis consistently for different stocks in the heat of the moment.
    Van Beek @ Stock Trend Investing recently posted..How to Act as a Real Entrepreneur with Your Personal FinancesMy Profile

  7. I think that FB will follow Google stock trend. We all think that it’s already overvalued and BANG! more money to come years after years… I quite interested in buying FB shares this summer 🙂
    The Financial Blogger recently posted..Life Changing Moments Worth Chasing AfterMy Profile

    • @TFB – I am torn. I really want to buy FB stock, but I am scared that it will plummet in the next couple of years. I suppose that is why I should stay with my index funds. I hope it goes gangbusters for you though!

  8. I wouldn’t invest in the Facebook IPO even if I was given the chance.
    Invest In 2012 recently posted..Facebook IPO = Ponzi Scheme 2.0My Profile

    • I honestly can’t blame you. I’m still a little torn on my end, but I understand why you would be very hesitant.

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