Facebook IPO: Should you try to buy it?

This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader

All market watchers have been buzzing about the news that Facebook is going public. The upcoming Facebook IPO is going to be different than other tech IPO’s that many traders and investors have been seeing lately.

Overall, companies go public to raise money to expedite growth for their firm. Facebook, however, is actually being forced to go public. Once a private company crosses the threshold of having more than 499 individual investors, they must disclose financials publicly. If firms have to disclose financials publicly, there is no reason to not be a full publicly traded company. It has been reported that Facebook crossed that threshold of investor numbers sometime in December. Facebook knew this was coming so they most likely have a very solid plan in place for how they want to conduct themselves while going public and how they want to arrive at a fair price for their stock.

Many people like to invest or trade stock in companies that they know and where they have a clear understanding of the business the firm is engaged in. This does not apply to the Facebook IPO. Do not try to acquire shares just because you think you know and understand the business well. Avoid thinking, “ I like Facebook, they make a lot of money, they have good management, and therefore I should buy Facebook stock.”

I am a trader and I care very little when someone tells me what stock they own. It is meaningless to a trader. I don’t care that you own Apple unless you tell me where you bought it. There is a big difference between owning Apple at $100 and owning Apple at $450. What is important with a trade or an investment is the price you paid and how long you have had it. With a company like Facebook, the price will be everything. Facebook makes money and has over 800 million users. They have great management and are not afraid to innovate, or to make strategic acquisitions. The issues for investors and traders will be the price of the IPO and what Facebook plans to do with the cash they are raising.

Because Facebook is not raising money for a specific purpose (like what many firms do), trying to get solid answer to what Facebook will do with this money is key.  Having a ton of cash is a good thing from a balance sheet perspective but not always from an investing one. Investors want a return on their money, not just the return of their money.

Facebook as a firm has a lot of things going well for it, but that does not always translate into a good trading or investing decision. Facebook has been an investable company for institutions and large individual investors for a while, it’s just the retail investor that has been left out. This Facebook IPO is not the same as most tech IPO’s of the past. Facebook has already passed through the phase of hockey stick style growth. It is an 8 year old company. If you are considering the Facebook IPO for yourself, think of it like buying a car. A lot of people like the 325 BMW. It has good handling, good horsepower, and a healthy selection of luxury features. The key element is that this car also comes at a price that many buyers see as fair value for what is being purchased, even if that price is high. The car would not get as many positive reviews if the price was higher, or let’s say, double. As good as that car is, it is not worth $100,000. It would no longer been seen as good value for money. Investors buy stock to either get a capital gain or income generation. If you choose to dip into the Facebook waters, make sure you are doing so at a price where you are receiving value for your money and a fair return on your investment.

Thanks Tusk. Make sure to check out the site: www.TuskFund.com or follow Tusk Trader on twitter: @tusktrader

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