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Want a piece of Facebook? Read this first

  • Facebook's initial public offering is set for Friday
  • Small investors will have a tough time buying shares
  • You've got to do your homework before investing
Want a piece of Facebook? Read this first

Facebook IPO 101

Facebook IPO 101

The 800-pound gorilla of social networking is about to hit Wall Street.

Facebook’s much-anticipated initial public offering, set for Friday, has a lot of people wondering how they can get in on the action. If all goes according to plan, Facebook stock will be for sale on the open market Friday morning. But most of the shares already will be spoken for. Institutional investors, mutual funds and hedge funds have been lining up and putting their orders in. The opening share price for the IPO will be set after the market closes on Thursday. Facebook today upped the range to between $34 and $38 a share, reflecting what the company says is increased interest from investors.

In a typical IPO, the big players set aside 15% of their shares for small investors, Scott Sweet of research firm IPO Boutique told But Wall Street analysts think the little guy might have a bigger shot at a piece of Facebook’s IPO, maybe as much as 25%, according to a New York Times report.

Investors who have accounts with online broker E*Trade will have the opportunity to buy shares, but there’s no guarantee. Other brokers like Fidelity and TD Ameritrade have restrictions on which of their customers can participate in an IPO. Of course, you can become a Facebook shareholder indirectly if your 401k or other retirement plan invests in mutual funds that buy Facebook stock. Or, you can buy one ceremonial share.

But just because you can buy a piece of Facebook doesn’t necessarily mean you should. HLN’s Jennifer Westhoven knows her way around IPOs, having covered them for years before becoming money guru on Morning Express with Robin Meade. She offers this guidance on how to decide whether you should invest:

Don’t be snowed by words like “biggest” and “billions.” This isn’t an opportunity to get rich quick. Is it a good deal? It might be. But you’ll need your critical thinking skills to make a good choice.

An IPO is like trying to touch lightning. It’s called an “offering”, but that’s a p-r term. You should be just as critical as if you were on the lot with a used car salesman. Are you getting a fair price based on what kind of shape the car is in? Or, in the case of Facebook, based on how much money they’re making and will make?

Here are the key questions to consider:

● Where is Facebook in its “success cycle”?

● Do you think Facebook is on the way up?

● Are you friends using it more or less?

You might think, well, Apple stock is more than $500 a share. But when Apple came out, IBM was the dominant player. Apple worked quarter after quarter to get its products into people’s hands. From Macs to iPods, the company built up a trust and comfort factor with its customers, many of whom moved into the total Apple experience – iPads, iPhones, etc.  And Apple is making real money selling those products.

Do you trust and feel comfortable with Facebook? Because that’s how they’re going to make money off you. If you answer no, how does everyone else feel?

How do you think Facebook will grow its business? Did you know that right now, the company doesn’t make any money when people look at Facebook on smart phones because it doesn’t display ads on that platform? If mobile computing is the future, Facebook doesn’t have a track record of making money in that space.

Do you know what Zynga is? If it stumbles, Facebook could stumble -- it says so in the prospectus from the SEC. Have you read the prospectus? That’s the summary of the business. It may be a little dense, but it should be required reading for anyone thinking about investing.

Bloomberg reports that many professional investors who have combed through the prospectus, went to the road show and listened to the sales job from management, aren’t jumping for the stock. So Facebook may be counting on small investors who don’t understand the business.

If you do feel strongly that this is a good stock at a fair price and you’re in it for the long haul, then by all means, buy (or at least try to). But be wary of the first day of trading.

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