What You Need to Know Before Investing in Facebook
The social networking site, Facebook, goes public this week in what could be the biggest ever IPO, and a lot of people are going to get rich.
But while insiders and friends of bankers will make a mint, individual investors, well, forget about it.
In fact, I believe the IPO market is stacked against regular investors.
IPOs are exhibit number one when we talk about an uneven playing field for individual investors in today's equities markets.
Take, for example, last year's most anticipated deal: the business social networking site LinkedIn.
It went public in mid-May at an offer price of $45 a share.
And, as in most IPO offerings, the insiders, the people who founded the company, the top execs as well as the investment bankers best clients were able flip their shares and lock in gains.
After the first day of trading, LinkedIn shares closed up at $94.25 a share.
But since then, they've fallen nearly 20%.
Check out this list of top brand name companies that went public last year.
It’s not just the names you know that encountered difficulty.
57% of the companies that went public last year are trading below their offer price.
In other words, even if you were able to snag the share price at the first day of trading close, it was a real crap shoot whether you made money.
Of the 17 internet IPOs that went public last year, only five are trading higher than their offer price.
When you look at the entire universe of IPOs that went public last year, the stocks were far more likely to trade below their offer price.
You would have been better off putting your money into an S&P 500 fund. Even some coal stocks did better!
There were some standouts though that bucked the trend like Invensense which is up 94%.
But these are the exceptions and let me explain why.
An IPO is an opportunity for original investors and managers to cash in on their hard work.
To get the payday, they hire investment bankers - Goldman, Morgan Stanley, and others - who spend their time trying to drum up investor interest in the new stock.
The insiders and the bankers and the friends of bankers make money because they create enough buzz there is an "aftermarket" -- that's what they call me and you.
Now, I know you're saying, “Hey Gerri, what about Google…it's trading way above its offer price.”
True enough, but that's one example. What of the other scores of companies that went public last year that are trading lower? We showed you a whole list of underwater IPOs in tonight's show.
Look, my point isn't that Facebook will be a dog. I don't think it will, but buying it tomorrow is a fool's game.
Do yourself a favor. If you're excited about Facebook and want to invest, wait until the chumps are out - a few days or weeks later - to see how it all shakes out.
Then decide whether the company is worth your money.