Money Matters: Experts warn investors to be wary of Facebook stock
Facebook's stock will begin to be publicly traded soon, but that doesn't mean you should jump at the chance to buy it immediately. YNN's Tara Lynn Wagner filed this report.
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With 901 million users, anyone can be on Facebook. Even your cat can have a page. But what the average investor can't have is a piece of the IPO.
"0.0 is probably the odds that investors [get] shares," said Jack Hough, a columnist with SmartMoney.com.
That may not sound very social, but it's the way popular IPOs work and this one is pretty popular. Generally speaking, the early action goes to people with very deep pockets.
"[Shares go to] high net worth individuals," said Ben Willis of Sunrise Securities. "Those people have their brokerage firms with the likes of Goldman Sachs, UBS, US trust."
Then there's the institutional holders, the mutual fund companies that manage billions of dollars. Examples of those companies, according to Willis, are "a Fidelity, a Capital RE, American Century." But even those and some low-cost online brokerage firms have set up rules, allowing only their most active and wealthy customers to make a request.
Other investors will have to take our chances on the open market, where the price may be far different from the IPO.
"Whatever people are paying, Ordinary Joe and Sally Saver can buy in at that price," Hough said.
But that doesn't mean you should. For one thing, Hough says Facebook is not a small startup company that might suddenly double or triple in value.
"You are not getting in on the ground floor of a fast-growing company," he said. "You're getting in on the 86th floor of a decent-growing company."
He also warns that Facebook's stock is likely to be valued at more than 60 times its earnings per share. That ratio is astronomical compared to a company like Apple, for example.
"Everyone knows Apple," he said. "Everyone loves Apple. It's around 14 times earnings. You're going to pay four times the valuation of Apple, relative to its earnings, to buy Facebook."
If you're someone who is constantly on Facebook and determined to own even a small piece, his advice is to hold off, at least a few days, until the dust, the frenzy and hopefully the price settles down a bit.
"The history of recent IPOs like LinkedIn and Groupon suggest that these prices tend to come down in the first days trading a little bit," he said. "So there's really no hurry. Wait and see what happens."