The latest buzz from Facebook’s initial public offering, or IPO, has raised many questions for investors. I can’t tell you how many calls I received from individuals wanting information in regards to purchasing Facebook stock. Several people even claimed investing in Facebook’s IPO was a sure way to make a lot of money. There are several misconceptions about IPOs and hopefully we can outline some of the basic facts.
What exactly is an IPO? An IPO is the first sale of stock by a company to the public in order to raise money. Going public allows a company to tap a vast range of investors creating the ability to quickly raise large amounts of capital. There are significant legal and accounting costs due to the continuous requirement to disclose financial and business information. This increased scrutiny and transparency usually allows companies to borrow money or issue debt at favorable interest rates. A company can also gain prestige and exposure being listed on a public exchange. Management and employees of publicly traded companies often have the ability to participate in stock option programs therefore helping retain talent.
Should I invest in an IPO? The answer to this question depends on your individual goals and should be discussed with your wealth manager. In some cases, investing in an individual stock can add substantial risk to your overall portfolio. Keep in mind, it is wise to maintain a diversified portfolio that fits your risk tolerance and is built to address your future goals. Maintaining a long term perspective is a key variable to investing and increases the chances of earning positive returns. Short term traders trying to make a quick buck often get burned. Facebook (FB), Groupon (GRPN), and Zynga (ZNGA) are recent notable IPOs. As of June 13th, 2012, all three company stock prices are trading significantly lower than their IPO price. Remember Warren Buffett’s famous quote if you consider investing in an IPO, “Be fearful when others are greedy.”
*The opinions in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does no protect against market risk. Stock investing involves risk including loss of principal.
Boy, aren’t we glad August is over? What an ugly month—wait till you get your statements!
It’s easy to despair when we have received four negative statements in a row. Many people look at the value of their accounts and say, “I haven’t made money in over four years—why am I bothering with this?”
These feelings are normal—and must be ignored if you have a good plan. It’s the emotions more than anything else that will throw you off. Let me give you an example:
DALBAR does a study that measures the results of the market annually with the average results that individual investors have obtained.
From 1991 through 2010 the S&P 500 index returned an annualized 9.14%.*
The average stock investor, however, only made 3.83% annualized!
And the primary reason for this horrible difference is emotions or lack of self-control.
On my next blog I’ll talk about ways to potentially control risk without using emotions.
*The S&P 500 index is an unmanaged index and cannot be invested in directly.
The opinions in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. To determine which investments(s) may be appropriate for you, consult you financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.