We’ll cut to the chase — unless you’re a close personal friend or relative of a Facebook executive, or you manage an enormous amount of capital, you have almost no chance of getting IPO pricing on a stock like Facebook.
Why? Well, as the Securities and Exchange Commission (SEC) points out, “the underwriters and the company that issues the shares control the IPO process.” The SEC doesn’t regulate how these primary shares are allocated.
In Facebook’s case, the Wall Street Journal reports that Morgan Stanley will likely be the lead underwriter for the IPO, with Goldman Sachs also expected to play a large role.
These investment banks are going to target large customers and institutional investors. The goal is to move shares by the millions, not the hundreds or thousands.
Even if you have an account with Morgan Stanley or Goldman, you’re probably not going to get to make any purchases as an individual — not unless you are a big-time celebrity or business mogul. (Ashton Kutcher, it’s your lucky day.) In most cases, the underwriter will call you and let you know if you can get in on the action.
What Can Average Investors Do?
Aside from buying pre-IPO shares on something like SecondMarket — which, again, has some basic financial requirements that will exclude most individual investors — investors interested in a Facebook IPO have a few options:
- Buy into a mutual fund that invests in IPOs. There are a few of these funds in the market, such as the Global IPO Plus Aftermarket fund from Renaissance Capital. The returns on these funds tends to be flat, however — and with a stock like Facebook, it’s unlikely that this fund will get much of the action.
- Buy on the aftermarket. This is where it can get tricky. Putting in a market order the day a stock opens can be risky. In fact, many retail investors were burned during the dotcom era for moving too fast on IPO stocks that never again exceeded their order price. Placing a limit order or stop market order can help alleviate some of the risk, but it won’t guarantee a buyer a piece of the action.
- Watch from the sidelines. Sometimes it pays to take a step back and watch the market from afar before jumping in. An IPO Facebook could be the next Google — but there’s also a chance it could also be the next Yahoo. Wait and see.