Google IPO

January 6, 2004 6:15 AM

What is the best way to get in on Google's IPO? I know nothing about investing, other than having a 401k. Can the average Joe get in on it without paying a broker or something like that?
posted by quibx to computers & internet (9 comments total)

Knowing nothing about investing is a great reason to stay away from IPOs, even from companies you think will increase in value over time. Consider buying when the price settles down, because it's extremely difficult for individual investors to ride that early-IPO wave, and institutional investors count on suckers like you to get in there after they do to heat up the market for them.
posted by majick at 6:29 AM on January 6, 2004

Unless Google has some kind of unorthodox IPO (which is doubtful), you need to have a relationship with Google or some kind of financial institution to get in on it. IANAB, but if you really "know nothing" about investing, stick with a fund. The cachet of owning individual stocks is just that, nothing more.
posted by mkultra at 6:29 AM on January 6, 2004

There has been talk that Google will go the "dutch auction" route with their IPO, which theoretically would give the little guy better access to shares, while at the same time erasing the huge IPO runup that quibx is no doubt dreaming of, which results from shares deliberately mispriced on the low side to route quick first-day profits from Google's coffers to those of the investment bankers' preferred clients.

Theoretically, that's how it would work. However, in capitalism, never bet against the ability of "preferred clients" to screw the small investor somehow.
posted by luser at 6:33 AM on January 6, 2004

I echo the sentiment of staying away from Google (even buying it on the open market on the first day, or buying any other individual stocks for that matter) until you learrn a bit more about the market. I'm doing this now - investing in a few individual stocks and reading a lot before I get too involved in individual stocks.

Even though Google seems like a sure thing, I'm sure this stock is going to see it's ups and downs - notice today's news that Yahoo is dropping Google as its search engine, for example. The market is a lot tougher on companies than it was in 1999.
posted by drobot at 7:01 AM on January 6, 2004

There are two ways to buy Google, either in the primary market, or the secondary market.

The primary market is the IPO market, and in order to buy shares this way, provided that this is a traditional underwriting, your broker needs to have an allotment of shares from the underwriters, Goldman Sachs and Morgan Stanley. In order for your broker to allot some of these shares to you, you either have to be lucky (random allotment), or be a very profitable customer for your broker (broker's discretion).

If the underwriting and distribution are done via a dutch auction, popularized by W. R. Hambrecht, wait to see what the details will be, as you may be able to buy shares on a more level playing field.

To buy shares on the secondary market, alll you have to do is wait for the stock to start trading on an exchange, and give any broker your buy order. This is the surest and easiest way to get the shares.

Most "hot IPOs" trade at a higher price than their IPO price. This is the root of some of the more recent Wall Street scandals-- because the favored customers of the underwriter reap instant profits at the expense of the prior owners of the company.

To illustrate, suppose Google is "worth" $30/share. MS and GS decide to price it at $25, and allot the shares to their best customers. The shares start to trade at $30 in the open market, and the customers get a nearly riskless profit in exchange for being profitable brokerage customers. The $5 per share difference between fair value and IPO price, which should have gone to the previous owners (and maybe employees) of Google wind up in the pockets of favored customers.

The Dutch auction minimizes this "spread", and ought to put more money in Google's pockets, and less money in the pockets of the brokerage customers who "flip" their shares.

If you buy Google after the IPO, you will be buying it what is purportedly fair value. While you won't be "getting over" on anyone, this is the easiest way to buy, and you'll probably be getting a fair price.

One final caveat: Beware the small float. At the peak of the internet boom, many stocks with, say, 10 million shares, had a float of one million shares. In other words, buyers were fighting over a small number of shares, relative to the total shares outstanding of the company. Because of this imbalance between supply and demand, there were shares available only to the most motivated of buyers, and this scarcity resulted in an unwarranted and unnaturally high share price. So if Google's founders or underwriters wind up controlling (and sitting on) a proportionately large number of shares, it's almost a certainty that you'll end up paying too much.

My email is in my profile if you have tangential questions.
posted by trharlan at 7:35 AM on January 6, 2004

Thanks all for your suggestions. This looks way over my head, and I need to go do some homework..
posted by quibx at 7:41 AM on January 6, 2004

Well, quibx, I'm not sure it's "over (your) head", since two equally well-qualified people can wind up with drastically different valuations for the same company. Any time you buy an individual stock, especially a new issue, you assume both systematic and unsystematic risk. (You can diversify the unsystematic risk away by constructing a balanced portfolio, but, anyway...) If you can stomach this risk, and you keep the majority of your assets in a well-diversified portfolio, it's certainly not going to kill you to take a flyer every now and then. You might even get lucky.
posted by trharlan at 7:54 AM on January 6, 2004

Building on the float issue (above) note that Google will isue a huge amount of shares to its employees, executives, family relatives etc.

These shares, by law, can't be sold for a requisite amount of time. I believe its 18 mos from 1st day of issue.

My point is, the amount of shares outstanding will actually be very low until the 18 mos mark, when a flood of shares will hit the market all at once. This has a well known and demonstrable effect on share price.

IPOs are indeed tricky. Not the place to cut your teeth on equity investment.
posted by Fupped Duck at 1:14 PM on January 6, 2004

Just to clarify -- the lockout period for insiders (employees, directors, etc.) is typically 180 days post IPO, not 18 months.
posted by msippey at 11:49 PM on January 19, 2004