Millionaires were made yesterday, but you’re most likely not one of them. Twitter’s highly publicized IPO (initial public offering for those unfamiliar with invest-speak) started out with a $26 price per share and almost immediately jumped to almost double that at $50.09 before calming down and hovering around $45-$47 for the rest of the day before settling at $44.90. All across the major news outlets, I read headlines like “#WOW! Twitter soars in IPO” and “Twitter shares surge in debut as investors stampede to IPO”. Awesome, right? Sign me up for the next IPO!
Hold on a sec. If you actually take a look at the chart for Twitter’s big day, you’ll see that they actually opened the day at $45.10. Say what??
That’s right. Like I said, millionaires were made yesterday, just not people like you and me.
How IPOs work
When a company is in the process of doing an IPO, they do what’s called a “roadshow”. Back in the day, that meant traveling across the country to meet with different investment firms to determine if they would want to buy some of your company’s stock. Investment companies would decide whether or not they would want to buy the stock and, if so, how much and at what price. Through that process the company offering the shares would determine at what price to sell their shares.
Nowadays it’s usually more localized in New York City where, for example, Twitter courted 600 investment firm guests last Wednesday. The Twitter IPO ended up starting out with $26 per share, but if today’s opening price was $45.10, who got to buy it at the $26 price? That’s right, the investment firms. Those companies then turn around on IPO day and sell a bunch of their shares to us normal folk at a premium, with today’s being $19.10 or 73.5%. And when you realize that these firms are investing hundreds of millions, that return sounds even better. No wonder people hate Wall Street 🙂
Now this isn’t a commentary on the ethics of Wall Street or what the right way to do it is. Who knows what would happen if a company were to bypass the roadshow and the large investment banking firms and make their initial public offering truly public. All I’m trying to say that for you and me, IPOs aren’t all they’re cracked up to be.
Why you shouldn’t invest in IPOs
So in reality, all those articles you read about the IPO are a bit misleading. By touting Twitter stock’s 72.9% one-day return, it makes the everyday Joe think they he could get a cut of that beautiful pie. But the truth is that if you bought your shares the moment the bell rang yesterday morning, at the end of the day, your one-day return is actually a loss of -.44%. And in after-hours trading it’s still going down. So what’s all the fuss about?
The truth is that IPOs generally start off hot then drop like a rock. Facebook, for example, debuted at $38 per share back in May 2012 and within a couple of weeks it was down to $25. It eventually went down below $18 per share before eventually building up to where it is now at around $47 per share. There are very few IPOs that buck this trend, but most follow that template. So the question is, do you want to deal with that? Sure you may make some money off the initial hype, but are you smart enough to know how to make rational decisions rather than let your emotions take control? The market’s swings are more spontaneous than a bipolar pregnant woman on steroids, so most people quickly find that they’re out of their league.
But what if I reeeeaaallly want Twitter stock?
Thank you, random citizen. Great question. What if you still think Twitter is a great long-term investment? After all, Facebook is doing better now, and take a look at where LinkedIn is compared to where they started a couple of years ago. Social media is the future!
I don’t disagree. All I would say is if you do anything, wait. The best time to buy Facebook wasn’t when it debuted at $38. It was when it dropped to $18. The best time to buy LinkedIn wasn’t when it opened its IPO at $83. It was a few weeks later when it was down to $63. So what’s the moral of this story? In my opinion, there’s nothing wrong with treating your stock purchases like you would your grocery purchases—wait until it you can buy at a discount. Now, that’s obviously a HUGE blanket statement and there’s a lot more that goes into the decision of when to buy and sell stock, but take a look at where the stock market was in 2009 and compare it to where it is today. What if we had all bought into the stock market when those prices were down? Just some food for thought.
Back to the millionaires
I guess when I said that millionaires were made, I should have said multi-millionaires were made multi-multi-millionaires, or in the case of the head dudes over at Twitter, billionaires. Of course, that’s just on paper unless they choose to sell the stocks, which I doubt they will. But still, wouldn’t it be nice…