Why All the Fuss About Facebook?
What's all the fuss about with Facebook?
Last week's IPO (Initial Public Offering) fizzled. Not only did the stock not take off to the moon, but it's going down now. But so what? That's what IPOs mostly do.
You can look it up. When private companies make an initial offering of stock to the public, the owners get rich. They get rich after they hire bankers to promote the offering to the public and the public bites. Even when the stock doesn't go up after the initial offering, the owners usually stay rich. As long as their stock is worth something, it's more than they had before the offering. And since the owners usually own millions of shares, that means they're worth a lot more than most of us are worth.
As for the people who buy the initial public offering of the stock, that's a different story. While the owners don't have to come up with any money to buy their stock, the people who buy the IPO do. The bankers get the public all hyped up so that the initial offering sells quickly. If they're really successful at promoting the stock, people trip all over each other to get first shot at the stock. And the fact is, most people who buy IPOs lose money. It's only in cases where the stock rises for a while after the IPO, and the people who bought the stock sell out at a profit, that people make any money. And, of course, when they sell to take their profits, that usually sends the stock price down. And - of course again - lots of people still holding the stock see this and sell out at a loss. They think there's something wrong; they made a big mistake. Meanwhile, that's just the typical IPO pattern. But most people don't know this. And so the IPO experience becomes yet another way people manage to lose money in the stock market.
So maybe Facebook went down faster than the average IPO. But the action of the stock losing value after the IPO is pretty typical.
I used to work for a big investment manager that would dole out IPO shares to their favorite clients. It was hysterically funny to watch the clients line up and be grateful for getting a piece of the IPO because most of them wound up losing money - at least in the short to mid-term. If they hold it for a long time they might make some money. But you didn't have to get the shares at the IPO to play that strategy. You could just buy the stock in the market after the price sent down after the IPO as it almost always does.
(By the way, I had nothing to do with this. These weren't my clients. And the reason I could laugh at it was that the folks who lost the money were usually rich folks who could easily afford the loss. I suppose they didn't laugh, though.)
So what's the attraction of the IPO? I'm not all that certain. I guess the hype gets people all juiced up. And that whole hype/juiced-up emotional stuff is what a lot of people are after when they trade stocks. That's a big reason why most people lose money in the stock market. It's more of a gambling thing, or an emotional high kind of thing. You can't make money that way. You just lose - over and over again.
But there's one thing about this Facebook IPO that strikes me. The hype was so huge and the stock was such a dud (so far) that I wonder if this isn't a sign that the markets aren't caught up in a kind of "mania" mentality. People caught up in manias exhibit this sort of irrational behavior in spades. Emotions soar - until you crash, or in this case, the market crashes. And the Facebook IPO certainly had enough mania-spades to deal all around.
I hope you didn't waste your time and money with the Facebook IPO. But really, what happened isn't much of a story - that is, unless it's an indicator that we're in the midst of a market mania. If we're in the midst of a market mania, that's another story. If that's the case, we could be heading for a big crash or at least a period of significant stock market declines. Then again, even if stocks do eventually hit a wall and drop 10%, 20%, maybe 30%, it could be a while before that drop actually happens. Manias tend to last longer than you think. Everyone gets so crazy they'll keep buying until they wind up owning enough overly priced stock so that they wind up losing the maximum amount of money.
Crazy, eh? But that just gets us back to the sad reality that most people tend to always lose money in the stock market.
PS - Check out this analysis of the Facebook IPO. It gets into detail about exactly why the IPO is a dud. It doesn't negate what I described as the typical pattern of IPOs (although Facebook's was more manic). But does it negate what I just said about this being an indicator of the markets being in a mania? Maybe. What do you think?
Last week's IPO (Initial Public Offering) fizzled. Not only did the stock not take off to the moon, but it's going down now. But so what? That's what IPOs mostly do.
You can look it up. When private companies make an initial offering of stock to the public, the owners get rich. They get rich after they hire bankers to promote the offering to the public and the public bites. Even when the stock doesn't go up after the initial offering, the owners usually stay rich. As long as their stock is worth something, it's more than they had before the offering. And since the owners usually own millions of shares, that means they're worth a lot more than most of us are worth.
As for the people who buy the initial public offering of the stock, that's a different story. While the owners don't have to come up with any money to buy their stock, the people who buy the IPO do. The bankers get the public all hyped up so that the initial offering sells quickly. If they're really successful at promoting the stock, people trip all over each other to get first shot at the stock. And the fact is, most people who buy IPOs lose money. It's only in cases where the stock rises for a while after the IPO, and the people who bought the stock sell out at a profit, that people make any money. And, of course, when they sell to take their profits, that usually sends the stock price down. And - of course again - lots of people still holding the stock see this and sell out at a loss. They think there's something wrong; they made a big mistake. Meanwhile, that's just the typical IPO pattern. But most people don't know this. And so the IPO experience becomes yet another way people manage to lose money in the stock market.
So maybe Facebook went down faster than the average IPO. But the action of the stock losing value after the IPO is pretty typical.
I used to work for a big investment manager that would dole out IPO shares to their favorite clients. It was hysterically funny to watch the clients line up and be grateful for getting a piece of the IPO because most of them wound up losing money - at least in the short to mid-term. If they hold it for a long time they might make some money. But you didn't have to get the shares at the IPO to play that strategy. You could just buy the stock in the market after the price sent down after the IPO as it almost always does.
(By the way, I had nothing to do with this. These weren't my clients. And the reason I could laugh at it was that the folks who lost the money were usually rich folks who could easily afford the loss. I suppose they didn't laugh, though.)
So what's the attraction of the IPO? I'm not all that certain. I guess the hype gets people all juiced up. And that whole hype/juiced-up emotional stuff is what a lot of people are after when they trade stocks. That's a big reason why most people lose money in the stock market. It's more of a gambling thing, or an emotional high kind of thing. You can't make money that way. You just lose - over and over again.
But there's one thing about this Facebook IPO that strikes me. The hype was so huge and the stock was such a dud (so far) that I wonder if this isn't a sign that the markets aren't caught up in a kind of "mania" mentality. People caught up in manias exhibit this sort of irrational behavior in spades. Emotions soar - until you crash, or in this case, the market crashes. And the Facebook IPO certainly had enough mania-spades to deal all around.
I hope you didn't waste your time and money with the Facebook IPO. But really, what happened isn't much of a story - that is, unless it's an indicator that we're in the midst of a market mania. If we're in the midst of a market mania, that's another story. If that's the case, we could be heading for a big crash or at least a period of significant stock market declines. Then again, even if stocks do eventually hit a wall and drop 10%, 20%, maybe 30%, it could be a while before that drop actually happens. Manias tend to last longer than you think. Everyone gets so crazy they'll keep buying until they wind up owning enough overly priced stock so that they wind up losing the maximum amount of money.
Crazy, eh? But that just gets us back to the sad reality that most people tend to always lose money in the stock market.
PS - Check out this analysis of the Facebook IPO. It gets into detail about exactly why the IPO is a dud. It doesn't negate what I described as the typical pattern of IPOs (although Facebook's was more manic). But does it negate what I just said about this being an indicator of the markets being in a mania? Maybe. What do you think?
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