Why You Shouldn’t Buy Facebook Stock Today
Even the hottest initial public stock offerings can lose steam after their first day of trading.
Sure, company insiders will make money selling at the opening price. And investors who used connections or big bucks to score shares at the IPO price will profit if they sell after a first-day "pop."
For everyone else, the wildly mixed record of other ballyhooed IPOs beyond their first trading session offers a lesson. It’s one that should remind us that buying Facebook stock Friday provides a chance to lose money.
It’s understandable that everyone wants to get in early on what could be the next Google. Shares of the Internet search leader had an initial offering price of $85 in 2004, started on the stock market at $100 and climbed above $700 by 2007. Even after moving sideways for more than four years, they’re still above $600.
But odds are against hitting a grand slam like that in the current market.
Cautionary points to weigh if the Facebook frenzy is tempting you to buy stock on Day 1:
YOU’LL PAY MORE FOR YOUR STOCK THAN THE SMART MONEY DID.
The vast majority of average investors couldn’t get in at the $38-per-share offer price. Those shares went largely to company insiders, the deal’s underwriters or their fat-walleted clients. The price almost always shoots quickly higher by the time orders to buy at the market price kick in.
SEVERAL OF LAST YEAR’S "MUST-HAVE" IPOS AREN’T ANY MORE.
- Pandora, an Internet radio company, went public June 15 at $20 a share. You could have bought the stock during the day for $26. It’s now trading under $11.
- Groupon, the online daily deal company, priced its stock at $20 a share in its Nov. 4 IPO. The stock traded above $31 the first day. Now it’s under $13.
- Zynga, the developer of "FarmVille" and other Facebook games, went public at $10 a share on Dec.16. The stock traded as high as $11.50 on its opening day. Lately it’s around $8.
- Even one of last year’s IPO stars isn’t a huge winner when you factor in the risk. LinkedIn more than doubled from its $45 offer price within minutes of hitting the market last May 19 and reached $122.70 before closing the first day at $94.25. It’s back to around $105 after a turbulent year, with a modest overall gain of 11 percent since the first day.
Buy-and-hold investors who want to make money off Facebook should hold off on the first day of trading. Maybe later they can think about buying.