Facebook Shares--5 Lessons We All Can Learn

Facebook went public less than two weeks ago and there are plenty of lessons investors can glean from that event. You probably already know what an IPO is. It's simply the first offer to sell shares of a company directly from the owners. And unless you live under a rock, you already know that the IPO was widely expected to be a huge success. But after all the dust settled, the offering actually fell on its face.

The shares were offered on the IPO at $38 shares. The price did shoot up to $45 during the first day of trading, but then settled back to $38.15--only a tad more than its public offer. Over the next several days the shares continued to sink and as of May 30 the shares were offered at less than $29, which is more than 23 percent below what people paid who got in on the IPO.

What went wrong?

Because of the sheer volume of trades, there were some glitches. But with respect to the drop in price, nothing went wrong. The market functioned perfectly. If anything "went wrong" it was the expectations that investors had about the IPO. Most of the people I spoke with regarding these shares expected a huge initial spike in the price. In fact, most of the people who wanted me to buy Facebook shares for them on the IPO considered the IPO a "can't miss" investment.

As a result of the Facebook dud, I think we can all derive a few very important investment lessons.

1. There is no "can't miss" investment.

As much as you think you "know" something is going to happen, you can never be sure. This goes for stocks, options, gold, and/or real estate. There is always a chance (sometimes a very good one) things will go wrong. Make sure that you only invest in those deals where you understand what the downsides are. And make sure you can live with the consequences if things don't go your way.

2. You can't predict the stock market, especially over the short run.

People pay lip service to the concept of not being able to predict the stock market, yet they often act as if they can predict it. Did you know that for every share that was brought to the IPO market, there were 10 shares that were ordered? With such a huge over-subscription, you'd expect the shares to skyrocket once they hit the open market.

They didn't because most of the people who put in orders for the IPO didn't really want to own shares for the long haul. They all believed that they'd make a tidy profit by simply buying the shares on the IPO and selling them on the open market. But what happened was that very few people wanted to buy shares on the open market. They only wanted them on the IPO for the quick hit. That's why shares fell so quickly.

There is no magic when it comes to any particular stock -- no matter how much you like the company. People often make the mistake of thinking that some stock is special and it will defy the market. This happens time and time again. In fact, some people still feel this way about the price of gold. Others feel this way about shares in Apple. What we learn from the debut of Facebook is that you really don't know what's going to happen with the market.

3. An IPO is not a golden ticket.

Investors often believe that if they can get shares on the IPO before the company goes public, they have an automatic profit. That is not true. As a matter of fact, many great companies that went public recently lost a bundle for the people who bought shares on the IPO. Facebook is only the most recent example.

4. Earnings drive prices

At the end of the day, the price of a stock is a function of the company's earnings. If a firm's earnings are rising, the stock price will follow all things being equal. I spoke to a great many people who wanted to buy Facebook. Not one ever asked me what was happening to the firm's sales or earnings. Yet it was common knowledge that both were slowing. Few people asked if the price of the shares was in line with earnings projections. But had they asked they would have learned that the shares were extremely overvalued. This is not to say that Facebook shares won't rise in the near-term. They could. But if the share price is to remain elevated, earnings are going to have to accelerate quickly.

5. Does it pay to take a risk?

There is nothing wrong with taking a calculated risk with an IPO. Indeed, the people I spoke with about the IPO could afford the risk and knew what they were doing. But before you take a plunge on IPO shares, make sure you are aware of the risks. And make sure your long-term investment plan is based on a sound investment strategy. Don't rely on your gut feeling about a particular stock or commodity.

Neal Frankle is a Certified Financial Planner in Los Angeles and owns Wealth Pilgrim -- a personal finance blog. His most recent blog post was his Perkstreet Review.



More From US News & World Report

--

Get stories like this on the Yahoo app and discover more every day.
Download it now.
Loading...
  • LG G6 renders revealed by Ghostek ahead of MWC announcement
    LG G6 renders revealed by Ghostek ahead of MWC announcement International Business Times - 28 minutes ago

    LG G6 case renders have surfaced online, ahead of the phone's launch at the MWC. … More »

  • Son and daughters of stars are fashion's new royalty
    Son and daughters of stars are fashion's new royalty AFP News - 3 hours ago

    They are fashion's new celebrity aristocracy, the sons and daughters of stars who are themselves becoming the kings and queens of the catwalk shows. From Lily-Rose Depp and Will Smith's daughter Willow -- the faces of Chanel -- to the Beckham boys … More »

  • Happy New Year with Rising Home Loan Rates?
    Happy New Year with Rising Home Loan Rates? feed_manager_auto_publish_494--autopubtest_WPTUMBLR_485 - 3 hours ago

    Happy New Year with Rising Home Loan Rates? … More »

  • The skin cure fad threatening Myanmar's elephants
    The skin cure fad threatening Myanmar's elephants AFP News - 6 hours ago

    "Elephant's skin can cure skin diseases like eczema," one shop owner, who requested anonymity, told AFP next to a counter brimming with porcupine quills and snake skins. Then you get the ash and mix it with coconut oil to apply on the eczema." He … More »

  • Who's who in the Syria conflict
    Who's who in the Syria conflict AFP News - 6 hours ago

    Talks aimed at ending Syria's nearly six-year war are set to open on Monday in the Kazakh capital, brokered by regime allies Russia and Iran and rebel backer Turkey. Key regime backer Russia began an air campaign in support of President Bashar … More »

  • Years of failed efforts to end Syrian conflict
    Years of failed efforts to end Syrian conflict AFP News - 7 hours ago

    Since the start of Syria's war in 2011, several diplomatic initiatives have stumbled over the future of President Bashar al-Assad. Here is a recap: - End of Arab solutions - In January 2012, two months after an initial bid to end the violence, … More »

  • US stocks rise, dollar falls as Trump era begins
    US stocks rise, dollar falls as Trump era begins AFP News - 7 hours ago

    US stocks rose and the dollar fell Friday as Donald Trump was officially sworn in as the president of the United States and Barack Obama's term ended. Trump's inauguration dominated a day that saw most major equity markets rise as the … More »

  • Automotive industry: Sales lower but resilient Business Times - 7 hours ago

    CYBERJAYA: The Malaysian automotive industry is resilient, considering there were no “surprises” by the industry players last year, despite lower sales figures, according to Malaysia Automotive Institute (MAI) chief. Chief executive officer Datuk … More »

  • Automotive industry: Sales lower but resilient Business Times - 7 hours ago

    CYBERJAYA: The Malaysian automotive industry is resilient, considering there were no “surprises” by the industry players last year, despite lower sales figures, according to Malaysia Automotive Institute (MAI) chief. Chief executive officer Datuk … More »

  • Top gainer: UMW Holdings shares soar Business Times - 7 hours ago

    KUALA LUMPUR: UMW Holdings Bhd soared almost 10 per cent yesterday, while its subsidiary UMW Oil & Gas Corp Bhd (UMW O&G) plunged more than 17 per cent, following the announcement of their consolidation plans. UMW Holdings was Bursa Malaysia’s top … More »

  • Top gainer: UMW Holdings shares soar Business Times - 7 hours ago

    KUALA LUMPUR: UMW Holdings Bhd soared almost 10 per cent yesterday, while its subsidiary UMW Oil & Gas Corp Bhd (UMW O&G) plunged more than 17 per cent, following the announcement of their consolidation plans. UMW Holdings was Bursa Malaysia’s top … More »

  • Trump's inauguration day of ritual upends tradition
    Trump's inauguration day of ritual upends tradition AFP News - 8 hours ago

    Donald Trump awoke as your everyday American billionaire. By noon he was sworn in as the nation's 45th president, on a whirlwind day that saw him thrust into the spotlight like never before. Trump, 70, began his Inauguration Day as many American … More »

  • Trump signs executive order against Obamacare health law
    Trump signs executive order against Obamacare health law AFP News - 8 hours ago

    President Donald Trump signed an executive order aimed at limiting the "burden" of the Obamacare health law that the incoming US leader has vowed to repeal. During the signing in the Oval Office, Trump's chief of staff Reince Priebus described the … More »

  • Singaporean buyer scores a bargain at St Regis Residences
    Singaporean buyer scores a bargain at St Regis Residences The Edge Property - 9 hours ago

    One of the first few resale transactions in 2017 resulted in a hefty loss for the seller. On Jan 3, a high-floor unit at St Regis Residences Singapore was sold at a loss of $2.3 million. The seller bought the unit in a sub-sale transaction in 2008 … More »

  • US stocks rise, dollar falls as Trump era begins Business Times - 10 hours ago

    NEW YORK: US stocks rose and the dollar fell Friday as Donald Trump was officially sworn in as the president of the United States and Barack Obama’s term ended. Trump’s inauguration dominated a day that saw most major equity markets rise as the … More »

  • US stocks rise, dollar falls as Trump era begins AFP - 10 hours ago

    US stocks rose and the dollar fell Friday as Donald Trump was officially sworn in as the president of the United States and Barack Obama's term ended. Trump's inauguration dominated a day that saw most ... … More »

  • Trump gets Obama's house, title _ even his Twitter handle
    Trump gets Obama's house, title _ even his Twitter handle Associated Press - 11 hours ago

    Donald Trump built his campaign on early morning tweet storms and hashtag-worthy slogans. Now president, he's in control of the White House's powerful social media arsenal, including the official @POTUS ... … More »

  • Business Highlights Associated Press - 12 hours ago

    ___ China's growth in 2016 slumps as Trump trade struggle looms China's economic growth sank to a three-decade low in 2016 as its struggling exporters brace for a possible trade battle with President-elect ... … More »

  • Stocks edge higher, snapping a 5-day losing streak for Dow
    Stocks edge higher, snapping a 5-day losing streak for Dow Associated Press - 12 hours ago

    Materials companies led U.S. stocks modestly higher Friday, recouping much of the market's loss from a day earlier and snapping a 5-day losing streak for the Dow Jones industrial average. Another crop ... … More »

  • How major US stock market indexes fared on Friday Associated Press - 12 hours ago

    Stocks closed modestly higher Friday, recouping much of the market's loss from a day earlier. The gains, which snapped a 5-day losing streak for the Dow Jones industrial average, came against the backdrop ... … More »

  • Gambia's Jammeh agrees to go, but exile terms not reached
    Gambia's Jammeh agrees to go, but exile terms not reached AFP News - 12 hours ago

    Gambia's Yahya Jammeh agreed "in principle" to hand over power to President Adama Barrow on Friday, Mauritanian and Guinean sources said, but differences remained before a full deal could be reached. Mauritania's President Mohamed Ould Abdel Aziz … More »

  • Dollar falls, U.S. stocks end higher after Trump inauguration
    Dollar falls, U.S. stocks end higher after Trump inauguration Reuters - 12 hours ago

    The dollar ended down while U.S. stock indexes rose in the last day of a choppy trading week, as investors reacted to President Donald Trump's inaugural speech. U.S. stocks started the day higher but gave up some gains after Trump started speaking. … More »

  • TrailStone buys Cargill's power and gas group - sources
    TrailStone buys Cargill's power and gas group - sources Reuters - 12 hours ago

    Commodities trader and investor TrailStone Group has purchased Cargill Inc's gas and power trading group, three sources familiar with the deal said this week. The move, first reported by Sparkspread, comes amid a reshuffling in the power and … More »

  • Dollar falls as investors unpack inauguration speech
    Dollar falls as investors unpack inauguration speech Reuters - 12 hours ago

    The dollar edged down on Friday as investors were underwhelmed by the limited scope of executive actions and the lack of concrete policy reforms in the inauguration speech of newly sworn-in U.S. President Donald Trump. Investors had been looking to … More »

  • Oil prices jump 2 percent ahead of producers' compliance meeting
    Oil prices jump 2 percent ahead of producers' compliance meeting Reuters - 12 hours ago

    Oil prices rose more than 2 percent on Friday on expectations that this weekend's meeting of the world's top oil producers would demonstrate compliance to a global output cut deal, but rising U.S. drilling activity limited gains. Members of the … More »

 
Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
 
Sign-in to view quotes in your portfolios.

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    0.172-0.002-1.15%
    N21.SI
    0.109+0.003+2.83%
    AAJ.SI
    0.121+0.006+5.22%
    40F.SI
    3.81+0.03+0.79%
    Z74.SI
    0.855-0.005-0.58%
    Y92.SI
  • % Gainers
    % Gainers
    NamePriceChange% Chg
    0.45+0.12+36.36%
    MR8.SI
    0.44+0.09+25.71%
    AWC.SI
    0.46+0.08+21.05%
    AYB.SI
    0.52+0.07+16.85%
    E8Z.SI
    0.20+0.02+10.50%
    BDN.SI
  • % Losers
    % Losers
    NamePriceChange% Chg
    0.22-0.03-13.73%
    AWI.SI
    0.155-0.015-8.82%
    F86.SI
    0.113-0.010-8.13%
    D79.SI
    0.23-0.02-8.00%
    T18.SI
    0.139-0.011-7.33%
    5NF.SI

Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    1.4246-0.0012-0.09%
    USDSGD=X
    1.5220+0.0019+0.12%
    EURSGD=X
    1.7591+0.0004+0.02%
    GBPSGD=X
    80.1670-0.478-0.59%
    SGDJPY=X
    5.4390+0.002+0.04%
    SGDHKD=X
    3.1179-0.0011-0.04%
    SGDMYR=X
    9,436.7451+30.9307+0.33%
    SGDIDR=X
    4.8209+0.004+0.08%
    SGDCNY=X
    1.0759-0.0017-0.16%
    AUDSGD=X
  • Commodities
    Commodities
    NamePriceChange% Chg
    1,210.20+8.70+0.72%
    GCG17.CMX
    17.11+0.11+0.66%
    SIH17.CMX
    88.68+1.12+1.28%
    ^XAU
    2.620.00+0.19%
    HGH17.CMX
    52.33+0.96+1.87%
    CLG17.NYM
  • Bonds
    Bonds
    TreasuryYield (%)Yield Change
    1.94-0.01
    ^FVX
    2.47+0.01
    ^TNX
    3.05+0.01
    ^TYX