There is so much anticipation surrounding Facebook’s initial public offering (IPO). I’ve had questions asked of me by interested investors. Such as:
- How do I participate in the Facebook IPO?
- What price do you think the stock will be when it starts trading?
- Do you think it will be a good investment?
- How do you think Facebook will use the money?
In hearing all these questions, I wanted to provide some background information regarding IPOs. For 2012, there have been 62 IPOs according to CNBC. An IPO is when a private company decides to offer its stock for the first time to the public. The stock begins trading on a specific date on a specific stock exchange such as the New York Stock Exchange(NYSE) or Nasdaq Stock Market.
The company’s top executives and its board of directors evaluate if an IPO is in the best interest of the company and its shareholders. Timing of an IPO is critical to its success. Once the decision is made to move forward with an IPO, the company has to ensure it has the proper financial team in place. This includes hiring an investment banker, attorneys, and consultants. Companies that decide to do an IPO, start their planning sometimes years in advance. After the determination is made to move forward with an IPO, there is a process a company must go through in order to list its stock on an exchange.
Let’s go through the IPO process:
- Company files registration statement regarding the IPO with the Securities Exchange Commission (SEC).
- SEC performs a stringent review of the registration statement.
- Company responds to SEC queries.
- Company plans road show. (Dog and Pony Show)
a. Company management travels the country giving presentations to analysts and institutional investors to create interest in the stock - SEC approves revised registration statement (S-1).
- Road show Kick Off
a. Meetings with institutional investors to stir up interest in the stock
b. Lunches for smaller investors
c. Investors start placing orders - Last Night of the Road Show
a. Determine an offering price for stock
b. Bankers start calling to book large orders - CEO may ring the opening bell at the NYSE or pushes the button on the Nasdaq.
a. Orders taken to buy or sell the stock - Company starts trading.
Now is Facebook the right investment for you? First in order to participate in an IPO, you must be an accredited investor. For an individual to be considered an accredited investor, that person must either have a net worth of about a million dollars or have annual income in excess of $200,000. For those of you who do not fit those criteria, you may participate after the stock begins trading on the stock exchange. Just because it is “hyped” in the news, does not necessarily mean it is the best investment for you.
At the root of any decision for selecting an investment, it starts with you, your risk tolerance, and your objectives. With any stock, remember you are purchasing a company and due diligence needs to be done to determine if it is worthy of supporting. When you purchase a stock in a company, you are saying that you believe in the company and its management team, you like the overall direction or mission of the company, and you have evaluated the financial statements and see that they are profitable and will be in the future. So I ask you, should you own Facebook? Before you make that decision, please seek advice from a financial professional.
