Quick turn-around strategy for buying Facebook stock?
May 8, 2012 9:45 AM   Subscribe

How feasible is a quick turn-around strategy for buying Facebook stock?

A friend of mine plans to buy about 3K in Facebook stock on the first day it is offered, and then expects to sell in two or more days when he expects the price will have risen, for a tidy profit. What are the odds that the stock will rise, and how much of a rise can be expected?
In addition, can I buy Facebook using just e-trade? I've read that about 15% of the stock will be available to the general public. Forgive me for these basic questions---TIAA-CREF takes care of finance for us---but would I just log on to e-trade when trading opens on May 18th? (6 a.m. PST?)
posted by ragtimepiano to Work & Money (19 answers total) 5 users marked this as a favorite
Individuals with E-Trade accounts can place a "conditional" order for Facebook shares (as long as they have enough cash in their account to cover the purchase and pass a suitability test). But placing a conditional offer "will not guarantee an allocation of shares," the brokerage says on its website.

E-Trade won't comment on the Facebook deal, but like most firms, it probably will bestow shares on its biggest and best customers.

Its site says IPO shares "generally will be allocated to interested customers after a subjective review" of the client's asset level, trading history, account tenure, margin debit balance, available cash/margin buying power and secondary market activity/flipping in their E-Trade Securities account.

posted by rtha at 9:49 AM on May 8, 2012

Shares are generally sold in 100 share lots. A quick google search puts the stock price at $45 a share (this isn't set in stone). That's more than the 3k your friend is looking at, so he's be getting an "odd lot." I doubt he could even find someone to sell him that (especially without an additional fee).

If I had $4,500 I wouldn't put it in Facebook stock, but this comment might make me look silly in 10 years. About the only way I would ever consider this is if this was an insignificant portion of my investing pool.
posted by cjorgensen at 10:02 AM on May 8, 2012

E-Trade's minimum condition offer request for FB is 50 shares, for what it's worth. The estimates are $28-35 but that'll be set on the 17th.
posted by kcm at 10:05 AM on May 8, 2012

I received an email from ETrade that said:

Dear Tilde,
Account Number Ending In: 4242

A new offering of securities is now available for Facebook, Inc. Visit the IPO Center to learn more.

Anyone wishing to participate in an IPO must have an account that is funded at least 5 business days prior to IPO pricing, among other requirements. Click here for details on account funding procedures and visit the IPO Center for additional requirements.

I clicked through the process to read it, lots of "we'll review you, we'll try, what do you think you want to put down, oh and if you sell it within 30 days we'll be kind of upset at you and not let you do this again (qualify for this special program)" and other blah blah blah.

I think this is the first time I got an email from them like this, though I've, in the past, hung around on IPO days/post IPO days whenever the real general public could buy and bought then, held it for the levels I wanted, then proceeded to sell when I was ready.
posted by tilde at 10:07 AM on May 8, 2012

E-Trade's minimum condition offer request for FB is 50 shares, for what it's worth. The estimates are $28-35 but that'll be set on the 17th.

Yes, that's pretty much what I recall skimming. I wonder if people who put in a conditional offer will know soon enough ahead of time to be able to jump on the offering if their condition is turned down (ie there's no hold on their money).
posted by tilde at 10:09 AM on May 8, 2012

I did some of this back in the original dot com boom of the late 90s and I'll just offer this one bit of advice.

Don't get greedy.

Take your $500 or $5000 profit (or whatever) after 24 hours and run like hell. I didn't on many occasions, and the list of tech IPOs I lost my ass on is long and glorious. I'd list a few here, but I doubt anybody would even remember the companies. I'm not sure how many I remember at this point.
posted by COD at 10:09 AM on May 8, 2012 [3 favorites]

What are the odds that the stock will rise, and how much of a rise can be expected?

If you do get a chance to buy it at the offering price, there's a decent chance that it will end up opening higher than that on the market, which can make you money. Once the actual price is set by the market though (which you would have to buy at if you can't get in at the offering price) then it's just like any other stock and it could go up or down. There's really no way of knowing. Groupon for example dropped around 8% in the first week. If you hold it for longer, like for a year, it will probably go up like the rest of the market but you have no way of knowing if it will outperform versus other investments. For example, for the last year IPOs in aggregate have lost about 20% from their initial opening price in their first year whereas the stock market as a whole has been slightly up during that period. Overall like most trading by people that don't have secret insider information, it's mostly just a gamble.
posted by burnmp3s at 10:28 AM on May 8, 2012

You are unlikely to get filled on this, if you are asking these types of questions. The way the IPO business works is…sort of corrupt, to varying degrees. It's definitely not a good place for the individual investor. Basically what happens is this:
  • Some group of people agree to sell some amount of stock to the "public". This can be the company selling new stock, diluting all the existing shareholders (but generally, if someone's going public, it's because the public market is willing to pay a far, far higher price for that stock than the private market, so this is usually still in current ownership's best interest. Smaller piece of a bigger pie. In the case of Facebook, this is not really true because Facebook's largely going public for compliance reasons and already has the Second Market price). It can also be existing shareholders, according to some pre-negotiated arrangement: a venture firm is allowed to sell X percent, current employees can sell Y percent of their holdings each, a large investor might sell a big chunk of their stake to the public, like when the Kamehameha Activities Association sold a big block their shares during the Goldman Sachs IPO.
  • To actually, physically sell the stock, normally a fleet of investment banks are retained. These are called "underwriters" and the group as a whole is called a "syndicate." The people selling their stock actually sell it to these underwriters. The way they are paid for running the deal is they pay a discounted price from the offer price for this stock (I am grossly oversimplifying things here, the reality is more complicated but this will suffice for this explanation). So I'm selling stock that's going to open at $10, I sell it the bank for $9.50 or something.
  • Now, the banks have blocks of stock they want to sell to the "public". For less popular IPOs, this means going out and convincing large institutional investors that they want to own this stock. This is the "roadshow" process. Here's why this is such a great company, here's why you should invest in it, blah blah blah. It can also refer to using hordes of old-school retail brokers to phone up high-net worths and flog stock to them, but this is way less common in modern times.
  • The investment bankers and the company's current ownership work together to set a price for the issue. They are antagonistic to one another, and the market sentiment is very difficult to gauge, so the actual opening price doesn't get set till the last possible second. The bank wants as low a price as possible: this way, they can easily sell the stock at a discount to a price they believe it will end up at, locking in a profit for them or any clients they choose to sell cheap stock to. It also makes it easier for them to support the price and keep a smoothly-functioning market, and reduces the risk that the stock immediately drops below offer price, which is very bad. The ownership, of course, wants the highest price possible for the company they've spent all this time and money building, and sees every dollar of profit made by quick-turn-around IPO flippers as them being cheated, even though to some extent without that profit incentive for initial buyers it would be very hard to get anyone to take a chance on the newly issued stock.
  • However, the bank has some important leverage points. One, they can simply point at that they won't be able to get the stock "open" without some leeway in the price. They need to get a broad deep ownership of whatever stock is sold to the public so that the market will function smoothly. So, let's say Facebook went "public" by selling 10% of itself, but the whole 10% was bought by one rich Russian. No stock would ever trade, the price would be all over the place, and no one would want to invest in it because they wouldn't be able to have confidence about getting in and out of the stock. There's no liquidity. Part of the risk of a tech-style (small percentage of company sold to public) IPO is that it is more difficult to maintain a smoothly functioning market in the stock, because the float is too small. The bank also has something of a responsibility to maintain a smoothly functioning market in the stock immediately after the IPO (both to the company, and because they need to maintain relationships with the buyers who bought the stock, who need to be confident they can sell the stock, or they won't buy future issues), and having a built-in discount makes this easier for them.
  • One of the biggest risks to a new issue is that it trades below its offering price immediately. This doesn't seem like it should be a big deal, but for historical and psychological reasons, and also (perhaps primarily) because the public equity markets are ruled by absolute morons, it is. It is very, very hard to maintain a market in an IPO that immediately drops below its offer price. Consequently, one of the tools the bankers use to deal with this is the greenshoe. The idea is that the bank can "sell" more shares than it actually sells. This sounds confusing, but basically what is happening is the banks are selling all the shares the IPO contains, plus they are shorting the stock a bit. Why? Because that way, if the price drops following the IPO, they can go and buy up the stock to support the price, and they are just covering their short, so they are making money here without having to get longer a dropping stock. What happens if they put the short on during the initial sale and stock rises following the IPO? They'd be screwed on their net short. This is where the greenshoe comes into play: it allows them to buy more stock from the issuing company at the offering price to cover their short without losing money. So having the greenshoe allotment is theoretically a tool for the offering syndicate to maintain some price stability without increasing risk (read: capital consumption) to the syndicate banks.
  • In the case of a hot IPO, like Facebook, things are a bit different. Everyone believes the stock will rise (so why doesn't it price higher at open? For all the reasons I mentioned above.) and so the bankers see the IPO as a way to take care of favored clients. They are basically selling them stock at a discount they can make a quick buck on, simply for holding it for a bit. The greenshoe can come into play here as well: if the stock is doing well, salespeople at the banks can call up their favorite buyside clients and say, "hey, we can fill you on that Facebook deal after all" because they are taking advantage of the greenshoe option. There are rumors that sometimes, bankers will actually cycle shares, especially greenshoe shares in hot IPOs, through favored clients with specific buyback prices. I sell to fund manager A at $10, buy back at $12, sell to fund manager B at $13 and buy back at $15, and some day, then, when things are slowing down, I sell it to the actual retail client. I don't know if this really happens. Basically the greenshoe in this case functions as a big free call on more stock, which is a perverse incentive to give to the bank that's also setting the offering price. The offer price ends up being the call's strike price, so of course the bank wants to offer less stock at a lower price and retain that free call, which is free money. Note: this is legal. The SEC allows this, for the reason described above (stabilizing the price by allowing the syndicate to end up net short the IPO at no real risk to themselves) .
  • After all this happens, normal people with oddlot orders and stuff might start to get filled.This is where the Etrade accounts come into the mix.
The reason I explain all this nonsense is because it is important to understand how the IPO shares actually get allocated. There's a whole bunch of people who do business with each other every day, in large dollar terms, that are making money off each other and taking care of their own balance of favors and so on. You, the retail investor, are far, far down the list of people here. Actually, you're not even on the list of people. Basically, if you make any quick "pop" money on the IPO at all, that means you got filled while the market was rising, and on an odd lot, that means some banker somewhere fucked up. The chance for you to make money is where the IPO becomes some freak of nature, like Netscape, where basically the public becomes completely unbalanced and goes into a tulip bubble mode. There's a bit of a "who's the sucker at the table"/"musical chairs" situation here. Like, if you want to buy the stock just because you believe someone else will pay more for it immediately…who is that guy? Why are you not the last guy in the chain? Why is he buying it? He thinks the same thing, right?

Here's the other thing: I won't feel stupid if it turns out you get filled at $40 and the stock closes at $100. It's totally possible for that to happen. I wouldn't advise you wager on a coin toss paying 1.5 to 1 either, even though you'd have a 50% chance of winning. It's just not a good bet.

My advice is that you should only buy this IPO if you believe the company is a good investment at the offer price (or more realistically, at the price you will get filled at).
posted by jeb at 10:35 AM on May 8, 2012 [122 favorites]

Best answer: I'm no kind of finance guy, stock broker, or professional gambler, but I'd approach it the same as I would the blackjack table if I only had a $20, a $10, and two $5s in my pocket: Once I'd doubled my money, I'd cash out my initial stake.

But don't listen to me, listen to jeb.
posted by ob1quixote at 11:17 AM on May 8, 2012

I'll add to jeb's very good explanation what my Morgan Stanley broker told me yesterday. My (well into retirement age, modestly wealthy) mom asked her about getting into the IPO allocation and the broker explained like this:

MS essentially indexes IPO allocations, meaning you have to take the "crap" (and I'm quoting here) as well as the hot. For Facebook, even if shares were available to good individual clients, that she never took any (read crap) IPO allocations before would rule her out. Not that the broker, who is very senior with many much larger clients in her book, thought there'd be shares for individual clients anyway.

I was happy to hear this since I think buying Facebook shares in the open market will be a bad choice in a three to five year horizon. Frankly I expect it to price near the top of the range and open closer to $60 than $50, a market cap of $150B or so. I would love to see the analysis supporting that price.
posted by billsaysthis at 12:08 PM on May 8, 2012

Quoted for truth from COD (eponysterically):

Don't get greedy.

Take your $500 or $5000 profit (or whatever) after 24 hours and run like hell.

Also, if you're only really interested in this IPO, I wouldn't worry about the threats from brokers that you shouldn't do this as they might blackball you from buying in again. They can't fine/imprison you/lock your funds (indefinitely). But I have been thinking about this, and it's such a freaking crapshoot I've decided off of it. Basically, I think the odds of the stock dipping after a high start is about equal to a runaway rise, so you could buy in to a heavy loss.
posted by IAmBroom at 12:21 PM on May 8, 2012

What jeb said. If the underwriters haven't already been in touch to promise a sweet deal on the day of the IPO, chances are you won't get one.
posted by holgate at 12:34 PM on May 8, 2012

Huh, I never knew about a secondary market.

The more you know, and all that.
posted by tilde at 12:41 PM on May 8, 2012

How Goldman Sachs Blew The Facebook IPO
has a bunch of information about the IPO process from the viewpoint of Wall St. and Facebook. The individual investor is almost never mentioned.
posted by gen at 10:56 PM on May 8, 2012 [1 favorite]

Something else to consider: if you're looking to ride the FB wave, but can't get initial shares, then you may want to possibly who knows perhaps (and a million other qualifiers) think about purchasing RENN or QPSA. These are FB equivalent stocks (RENN is China's FB and QPSA is Latin America's FB). I would actually stay away from QPSA because of various reasons, but RENN may be a good one-week play. They announce earnings on May 14, so you may wait to jump in after that. In the day or two before FB goes public, there will be people looking to buy in, and I wouldn't be surprised to see some of that money go to FB equivalents. As mentioned above, though, don't get caught holding the bag. I'd sell on the day of the IPO, if not the day before.
posted by (Arsenio) Hall and (Warren) Oates at 5:49 AM on May 9, 2012

Although, looking at the weekly chart, the RENN ship may have sailed already.
posted by (Arsenio) Hall and (Warren) Oates at 6:19 AM on May 9, 2012

@MktplaceRadio> How to get an early piece of Facebook's IPO
Joe Magyer (Motley Fool): You could go ahead and, you know, express to your broker that you'd like to try and get shares. Odds are that you probably won't get them.
Not to worry, says [Southern California investment advisor Robert Pagliarini]. Investors could learn a lesson from Google's IPO.
Pagliarini: I mean there was a lot, plenty of opportunity to buy into Google after the IPO, and after the "pop" of Google, and so you don't have to be in on Day One.
In fact, he says, investors might even be better off waiting out the euphoria.
posted by FlyingMonkey at 4:03 AM on May 16, 2012

Fri May 18 07:29:18 2012 E*TRADE Financial Account Alert

Acct.no.: 1234-5768 RE: Public Offering Order 20 FB.We were unable to allocate shares. Possible reasons: Offering priced above limit or high demand for shares.

posted by tilde at 5:31 AM on May 18, 2012

So far it has lost 15% of its value from the offering price of $38 even though the market as a whole has been up slightly over that period, so the hold for a few days strategy wouldn't have worked in this case. Whereas the people that sold immediately when the stock opened at $42 would have been able to make a quick 10% profit if they were fast enough (and if the NASDAQ trading problems didn't stop them from doing it). This is a good example of why these sorts of short term trades are mostly gambles, if you have a properly diversified long term investment portfolio you're probably not going to lose 15% in three days unless something huge happens in the economy.
posted by burnmp3s at 7:57 AM on May 22, 2012 [1 favorite]

« Older Is it destination envy or a real problem?   |   Do not go gentle into that good night Newer »
This thread is closed to new comments.