Ask Stacy: Should I Buy Facebook?

Photo (cc) by Robert Scoble

Every now and then, there’s an initial public offering (IPO) of stock in a company so popular, the excitement spills over from Wall Street to Main Street. It happened with Google, LinkedIn, and Groupon – and now it’s Facebook’s turn.

Should you try to get in? That’s the question being asked everywhere these days, including in the following email I recently received…

Dear Stacy,

I love your site! My question is about Facebook. Should I try to get in on the IPO? Will it go up? Is this a good company to own? Please respond as soon as you can, because the stock is coming out soon…

Sarah

Facebook is currently scheduled to go public May 18, although there may be delays due to investigations by the Securities and Exchange Commission (SEC). Here’s my take…

Should you buy Facebook on the IPO?

Absolutely – if you can.

While nothing is ever certain in the stock market, odds are good that when a company as popular and publicized as Facebook goes public, the stock will go up the instant trading begins. So if you were ever going to take a flyer, this would be a good time to do it.

Getting in on the initial public offering means you’ll be buying the stock before it goes public. Those in on the IPO are expected to pay from $28 to $35 per share. It’s quite possible that it will begin trading at prices much higher than that – perhaps north of $50. In other words, buy 100 shares at $30 before trading starts, and the instant it hits the market you could be sitting on a 60 percent profit.

But therein lies the problem. Facebook is popular, and the demand for IPO shares radically outstrips supply – that’s why it will go up when trading begins. So unless you’re an important client of one of the 33 investment firms participating in the underwriting, you probably won’t be able to buy IPO shares. What’s an “important client?” Say, someone with a stock account of $500,000 or more.

In short, hot IPOs like Facebook are a classic example of how the rich get richer. It’s practically a sure thing that this stock will produce instant profits – that’s why it’s practically a sure thing that you won’t be in on the ground floor.

Should you buy Facebook on the open market the day it starts trading?

Probably not.

As I just explained, because of its popularity, investors will be crowding into Facebook the instant trading begins, potentially pushing prices far beyond what the company is reasonably currently worth. No matter how good a company is, there’s a price at which its stock is overvalued and not worth buying. The first day of trading, this stock will probably be overpriced.

If past is prologue, the best idea is to wait till the hype fades and the stock settles back down. Very few stocks go up in a straight line forever. You’ll probably have the opportunity to buy it days or weeks later for less.

Should I buy Facebook at all?

You should never buy any stock if you can’t afford to diversify and hold for the long term. The fewer stocks you have, the more risk you assume. Same with your time horizon: the shorter, the riskier. Owning Facebook as a part of a diversified portfolio of stocks you intend to hold for years could be a wise move. Buying it as your only stock when you’re going to need the money in a few months would be a dumb move.

That being said, Facebook is a game-changing company, and a profitable one. Like Microsoft, Google, Apple, and others, Facebook is best-in-class and cutting-edge. Personally, I’ll be buying at some point – but only if the price is reasonable relative to the profit potential. If that never happens, I’ll never own it. But that won’t be the first, or last, big one that got away.

There’s plenty to read about Facebook. Here are a few articles that might help you decide if the stock is a “like”:

Got more money questions? Browse lots more Ask Stacy answers here.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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