The social networking powerhouse Facebook will offer its Initial Public Offering (IPO) this month with a share price of $28 to $35, according to an the United State Securities and Exchange Commission (SEC) report. That would set the company’s total value as high as $86.6 billion, although it is expected that the price will rise before the company finally goes public.
An IPO is the first sale of stock by a company to the public. It can be used by either small or large companies to raise expansion capital and as a result the business will be publicly traded on one of America’s stock exchanges.
The excitement and anticipation surrounding the opportunity to buy a piece of the billion dollar Facebook pie is immense, and it’s being talked about all around the world by the media and everybody from veteran investors down to the more than 900 million members of the website.
It is common knowledge that Facebook is a billion dollar company based on revenue and many are waiting on pins and needles for the rumor to become reality (and to hopefully make a quick buck), but Melanie Perry warns that getting wrapped up in the hype without first doing your homework is a dangerous game.
Perry, a financial representative who graduated from University of California at San Diego with a bachelors of science degree in quantitative economics also conducts seminars and workshops for professional organizations, churches, sororities, real-estate firms, and women’s organizations throughout the nation. She hosted her own radio show entitled “Getting Your Financial House in Order.” In addition, she has authored “All About the Benjamins: Helping
People Create Wealth in the Midst of Financial Insanity.”
For a person who is seriously considering investing in any company, Perry said they must first ask themselves five essential questions:
1. Do I have at least three months (at best 12 months) of income set aside in a savings account in case of emergency?
2. Do I have at least one month of my gross income set aside for unexpected expenses other than emergencies?
3. Am I taking money from my wealth account, as opposed to my tax return or savings account to finance this investment?
4. Do I have a clearly thought out financial plan for all of my retirement needs to be met?
5. Have I properly evaluated where investing in this company fits into my financial life plan?
Perry says that if, and only if an individual can answer yes to all of these questions, then investing in a company may be a suitable option.
“If this isn’t a plan that has been well thought out and researched, then it is unlikely that it will lead to sustainable wealth,” said Perry. “Answering yes to those questions is key because these are the fundamental things that you need to have in place first. Having the disposable income to take the risk, and understanding the inner workings of the company you are considering investing in are extremely important.”
“Never invest in a business you cannot understand.”–Warren Buffet
“But Melanie, it’s only $35 per share! I can afford that. Why can’t I just throw caution to the wind and if it works out, great! If not, I only lost $35, right?”
Perry warns that this type of thinking, heavily based on emotion, and not research is gambling, not investing.
“When people make investments like this, it typically doesn’t end well. If you know nothing about how the company works; if you don’t read their financial reports and closely follow their business practices, how will you know when to sell? How will you navigate the market without even understanding stock terms? How liquid is the stock? If you want out, what are the fees? Maximum loss? Maximum gain? There is a lot that goes into understanding the way stocks work, and if you are going to have sustainable wealth and success from investing in the stock market, you must understand it.”
Perry also noted that although $35 doesn’t sound like a lot, you typically cannot purchase only one share; many brokerage firms have a $2,500 minimum for purchases.
“So realistically, if you are still developing in your financial situation, no, you cannot afford it when you take into account that you do not yet have the income set aside for emergencies, retirement, and life’s other many unexpected turns,” Perry said. “If you are trying to stay afloat, then you don’t need to invest. You need to focus on maintaining these basic needs and creating a solid foundation.”
Perry said that her advice was not to discourage individuals from investing, but instead to be very straightforward about what it takes to be a success in the market. She also identified the possibility for growth as a benefit to investing in IPOs, which tend to be very lucrative.
She summed it all up by saying that investing in stocks long-term typically is a good way to increase wealth, when strategic financial planning has been put into play.
“Wealth is something that anyone, regardless of race, sex, gender or age can attain. It’s all about your mindset,” she said. “If you have to miss out on this opportunity, that is fine. There will be more companies and more opportunities, when you are ready to take them on.”
Facebook insiders–including CEO and cofounder Mark Zuckerberg, and venture capital investors such as Palo Alto-based Accel Partners–will be selling nearly half of the 337 million privately-held shares to be offered, which is rare. Typically shareholders don’t want to sell away that power.
Andrew Stoltmann, a securities attorney in Chicago said, “It’s always disconcerting when you see the founder or insiders rushing to the exits.” Stoltmann also believes buying into the company is high-risk due to Zuckerberg’s outsized control over the firm at 28.2 percent ownership, according to the Securities and Exchange Commission. Accel Partners comes a distant second with 11.4 percent.
What this means, says Facebook watchers, is that essentially Zuckerberg has the power to run the company as he sees fit without needing approval from the rest of the major partners or his board of directors. The CEO flexed this muscle just last month when he decided to acquire popular photo-sharing website Instagram for $1 billion.
Perry agreed with Stoltmann, adding that when investing in Facebook you really are investing in Mark Zuckerberg as opposed to a team, or the company as a whole.
Individuals are sometimes subject to making decisions based on impulse and emotion, which is the benefit of having an advisory team. But, if it’s that easy to go over their heads, investors are essentially at Zuckerberg’s mercy.
A factor in why many of the insiders are selling portions of their stock is to avoid facing an increase in their personal income tax, when the company goes public. Zuckerberg’s tax liability stems from his decision to buy 60 million more shares in the company at 6 cents apiece, according to the SEC. While he’s selling 30.2 million shares–worth up to $1.05 billion at the current projected price–to cover that tax bill, he will retain 503 million share after the offering.
Facebook’s IPO is expected to set records for an Internet company. Google’s IPO in 2004, which set the company’s value at $23 billion and reaped $1.9 billion, is the current record-holder for funds raised and valuation.
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