We interrupt our normal coverage of our Protecting Income series to bring you part 2 of our Dose of Reality series. If you missed part 1 or it isn’t fresh in your mind, hop on over to learn why comparing yourself to Warren Buffet is not a good idea. Here in part 2, we’ll explain why investing in the highly anticipated “IPO” of instabook is a bad idea.
Anyone wanting to invest in the IPO and asking the question, “how do I buy shares of the facebook IPO” probably doesn’t have the ability to buy ANY IPO shares. Otherwise, you probably wouldn’t be reading this here. But, you can buy at the $38/share or whatever they are asking and sell to some schmuck when the price spikes to make a handsome profit, right? Well, who is that schmuck?
Here is how it works. The Zuck and his high brained team are going around to banks and investment firms the next couple of days convincing the banks facebook is actually worth what they say they are worth. The banks will then go to their institutional investors and hedge fund managers to buy the shares. They buy at the IPO price. And since there is so much hype around the IPO, you’d have to be out of your mind to pass up on some IPO shares. You’ll see later why you would be crazy to pass up on some actual IPO shares.
After the institutional investors ($10′s of millions to invest) and hedge fund managers pick over the opportunity, the scraps are then passed on to us, the retail investor. But, with facebook, everyone will clean their plate. So, put in those orders with your brokerage house, but don’t be disappointed if you don’t get any IPO shares.
Why won’t there be anything left for retail investors? Because of all the hype. This is what happens after the IPO. All the retail investors think they can make some money. So, they put in an order with their brokerage house to buy on the day after the IPO on the open market thinking this is actually buying the IPO. When in fact, it is buying after the IPO on the open market. The price shoots up, those with IPO shares dump some and make a profit. Then, after the retail investors are done getting in on the action, the price will settle. So, say facegram opens on the market @ $38/share. Then spikes up to $50 when all the retail investors are buying through their buy order placed the day before. Then it settles back down around $43/share. You just lost like 14%. But the headlines will read, “Facebook IPO a success, shares go from $38 to $43.” The institutional investors will throw us retail people a bone and gladly sell their shares for a 31% profit.
Don’t be a schmuck, you’ll loose as a retail investor. Of course, we could be entirely wrong and you could make millions. We’ll be happy for you if you do, but we’ve seen this go down enough times to be highly skeptical. But please, if you do make millions, come spike the football here in our face by leaving a comment. If you want to buy facebook, do so in 6 months to a year, but we recommend to just let your index fund pick it up when the time becomes appropriate.
Don’t think you are buying the facebook IPO, you are buying after the IPO. And don’t be a schmuck.