When people hear that a graffiti artist who took Facebook stock instead of cash for paintings he did at Facebook’s headquarters will soon be a millionaire after the company goes public later this year, it’s hard not to wonder if there is any way you might still be able to cash in on Facebook’s riches.
Unfortunately, for most common folk,participating in Facebook’s IPO isn’t an option. But once the stock starts trading on the public market, eventually regular people will be able to buy shares. It’s hard to say at this point whether owning post-IPO Facebook stock will payoff in the long term. But considering that Google debuted on the public market at $85 a share in August of 2004 and eight years later is trading at around $600 a share, some optimists are hopeful they still might be able to cash in on the Facebook dream.
In this edition of Ask Maggie, I explain how the IPO process works and how a regular person can eventually get their hands on some Facebook stock. I also help another reader figure out if he should ditch his Verizon contract and switch carriers for a new iPhone.
Investing in Facebook
Dear Maggie,
I am really interested in buying Facebook stock. I’m a 24-year-old college student with little money to my name. I have never owned stock before and don’t have a clue how the stock market works. I just have a feeling investing in Facebook is an opportunity to make some decent money over time. What do I have to do to get Facebook stock? How much will the stock cost? When will it be for sale? I’m very confused about the process.
Thanks,
Nicole from New Jersey
Dear Nicole,
First, I have to tell you that I am a technology journalist. I am not a financial adviser nor am I a stock broker. So I am not really the best person to give you investment advice.
That said, Facebook is a hot technology company, and CNET has devoted a lot of attention over the past week to covering the Facebook initial public offering or IPO. And I think there may be many readers out there who don’t quite understand what all the hub-bub is about or how it relates to them. I decided to answer your question in Ask Maggie to help shed some light on the process and help explain how it relates to the average person.
So let’s start with the basics:
What is an IPO?
An initial public offering, or IPO, is the first sale of stock by a company to the public. One of the ways a company can raise money to expand its business is to sell shares of stock.
A private company, such as Facebook, could ask its existing investors to pony up more money, or it could try to find other investors. But when a company gets to a certain size, the most lucrative way for a private company to raise money is by selling shares of the company to investors on the open market.
And that’s what Facebook is preparing to do. Up to this point as a private company, Facebook has been able to invite or deny anyone to be an investor in the company. Once it starts trading on a public stock exchange, anyone with cash can buy shares in the company. And for the most part, they’re free to sell those shares when they want.
I keep hearing about people getting rich off the Facebook IPO. Can I get a piece of this action?
First of all, the individuals who stand to make the most of out this deal are the founders of the company, the venture capital investors, and the bankers arranging the deal. Also, people who joined the company in its early days will likely make a substantial amount because they were likely given stock options as part of their employment compensation. And there are a few folks, like David Choe, the graffiti artist who was also paid on stock options. Once the company goes public, those shares will be converted to stock. And after an initial waiting period, shareholders will be able to trade the stock.
Since you don’t work for Facebook, you’re not an early investor, or a close friend or family member of the founders, chances are you don’t have stock options. And since you’re not one of the bankers working on the deal or someone with millions of dollars already invested with the bank leading deal, you’re also not going to get a crack at the IPO. To understand why you’re locked out of the IPO, you have to understand how the process works.
There is only a limited number of shares of the company that will be sold to raise the needed cash. The company hires an investment bank to helps sell its stock and usher it through the IPO process. These banks are trying to get the most money they can from the sale. So for a hot IPO, such as the Facebook IPO, they won’t be selling the stock to average consumers. They will be selling it to their institutional investors and to some of their very rich clients – think Warren Buffet and Mitt Romney. We’re talking real one-percenters here.
So when will the stock be available to me, and how much will it cost?
It’s a long process from filing for an IPO to actually going public. Facebook just filed its S1 document with the Securities and Exchange Commission last week. This is the document that its underwriting bank helps it prepare to inform investors of the company’s financial situation and to disclose any potential risks. This document officially kicks off the IPO process.
Once this document has been filed, the SEC needs some time to make sure all material information has been disclosed to the public. And the underwriters begin marketing the deal to their clients. After the SEC has satisfied its investigation and the banks have done their roadshow, a date can be set for the IPO. Facebook is expected to go public some time in May.
At this point in the process, the price of the initial stock offer is not yet known. The underwriting banks meet with Facebook to figure out what the initial price should be. Remember the banks and Facebook want to get as much money as they can out of the deal. But they don’t want to value the stock too high and have it crash soon after it begins trading publicly. They also need to be cognizant of what the market is doing. In some cases, companies may wait a little while until the overall market conditions improve.
The price for each share of stock will typically be set the day before trading begins. At this point, all the IPO investors will get the stock at that defined price. And the company will collect its cash. (This is how Facebook will make the projected $5 billion.)
Then the stock will begin trading on the open market. Depending on several factors, the stock could go up or down. But given the frenzy around Facebook, it’s likely to shoot up a lot on the first day. And it could remain high for weeks or months.
What does this mean for me, an average investor?
As I mentioned above, you won’t be participating in the IPO. Your only option will be to buy the stock on the open market, and given the hype around this IPO, the stock is likely to be priced much higher than the debut price once you get around to buying it.
So at least for the first few days, weeks or months, Facebook may not be a good investment for you. I’m not going to tell you to buy Facebook stock or not. I’ve already mentioned I am not an investment expert. But I can tell you that some IPOs are hugely successful out of the gate, and the company’s stock price may soar for a few days, weeks, or months. In the case of Google, the company’s stock has continually climbed for eight years. But for many IPOs, after an “initial pop” many stocks end up selling below their IPO price within a year.
So my advice to you is to be cautious. Investing in any stock is always risky, but investing in a company that has no trading history and no financial history available for you to analyze, can be even riskier. Depending on where the company prices the initial shares of stock and how high the price gets, you may want to wait a little bit to see how the market reacts. Remember the first rule in investing is to buy low and sell high. Of course, finding those low and high points is not easy. If it were, there would be a lot more millionaires out there.
Good luck!
How can I get rid of my Droid for an iPhone?
Dear Maggie,
I’m in a bit of a spot and need some advice. My current smartphone is a Droid Pro on Verizon Wireless. This is my second model of said phone. To say I’m unhappy with this phone would be a severe understatement. With the first one, after the update to Gingerbread it was rendered near useless. The phone would restart several countless times a day while some apps just wouldn’t load. Luckily, Verizon replaced this phone. However, it was replaced by one just like it. Now, on my second Droid Pro, some of the problems are returning.
I’m convinced that I’ve picked a bad phone. Is there any way out of it? I am a Mac user and would love an iPhone. But I’m not due for an upgrade until next January. So here’s the real question. Is it worth ditching my Verizon contract and switching to another carrier to get an iPhone? Or is there a way I can upgrade early because I’m unhappy with my current phone?
Thanks,
Unhappy With Droid
Dear Unhappy With Droid,
I’m sorry to hear that you’re having so much trouble with your Droid Pro. But you may want to stick it out as long as you can with the old phone, unless you’re willing to fork over some cash.
If you aren’t eligible for an upgrade from Verizon until next January, you have a few options. But they’ll all cost you. First, you can trade in your existing phone and buy a new iPhone from Verizon at full price. A brand new iPhone 4S starts at $649. Verizon also sells the iPhone 4 for a little bit less.
The other option is to trade-in or sell your old Droid Pro and buy a used iPhone. You can either buy a used iPhone 4 or iPhone 4S from Verizon or you can check out the dozens of sites online that offer used iPhones. You may be able to get one for $200 or less.
Depending on how much it will cost you to buy a used iPhone, you could consider breaking your contract and signing up with a different carrier. But the switch will still cost you.
Verizon charges a $350 early termination fee for ending a smartphone the contract. It says the fee is to recover the cost of the device. So it deducts $10 from that fee for every month you have service. If your contract ends in January, then you are halfway through your contract. If you terminate the contract now, you’ll owe Verizon $230. If you sign up for new service at AT&T or Sprint, you can get the new iPhone 4S for $200.
So you will have to spend $430 to get the new iPhone 4S if you break your contract. This is cheaper than buying a new iPhone 4S and staying on Verizon’s network. But it could be more expensive than sticking with Verizon and buying a used iPhone.
Keep in mind if you break your contract and go to another carrier, you’ll be starting a new 2-year contract, which may prevent you from getting the latest iPhone when it’s released later this year.
I hope that advice was helpful. Good luck!
Ask Maggie is an advice column that answers readers’ wireless and broadband questions. The column now appears twice a week on CNET offering readers a double dosage of Ask Maggie’s advice. If you have a question, I’d love to hear from you. Please send me an e-mail at maggie dot reardon at cbs dot com. And please put “Ask Maggie” in the subject header. You can also follow me on Facebook on my Ask Maggie page.
