You probably have a Facebook account, right? Maybe you don’t, but even so, you’re familiar with the social network and probably aware of the hype and hubbub surrounding the company’s Initial Public Offering (or IPO) last week.
A lot of people I know have been talking about whether they’ll buy shares or not. It’s definitely opened up discussions amongst twentysomethings about investing in the stock market. Unless you work in finance, the stock market might be something you follow kind of vaguely, but not really. Let’s face it, it can be kind of unsexy.
However, it’s worth understanding some of these terms (like what an IPO is and what buying shares of it means). Otherwise, it’s easy to get caught up in the excitement of everyone talking about something and either finding yourself feeling like you’re on the brink of missing out or like you should plunge in and buy something you don’t really understand.
So, what is an IPO?
An initial public offering refers to the first time a formerly private company offers shares for sale to the public. Previously, you couldn’t buy shares of Facebook. The only way to get them was to work for the company and (hopefully) get the option to buy them as an employee (or have them given to you as a part of your compensation).
You can see why people would be getting so excited about this. After all, we’ve heard a lot in the news the past few years about the vast riches Mark Zuckerberg has made on his social empire. It’s also a company that we twentysomethings know very well, and understand the impact of. However, you should know that IPOs can be risky business.
Why? You’re basically gambling. It’s impossible to know whether that company’s stock will go up or down the day after you buy the IPO. There’s no historical information about it (trading-wise), so you can’t do that kind of analysis. The bet you’re making is basically that you WILL be able to sell your shares later for more than you bought them for. That, unfortunately, is impossible to say with certainty!