The Facebook IPO – What It Means For You
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?
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!