Social media giant Facebook is planning to sell stock in the company, beginning sometime later this month.
One of the biggest names in social media, Facebook, is planning what stock markets call an “initial public offering,” or IPO.
What the company will be doing, for the first time, is giving the public a chance to buy stock in Facebook. When they buy the stock, investors will become part owners of the company.
For eight years, Facebook has been owned by its founder, Mark Zuckerberg, and others who helped create it and have worked at the U.S.-based company. In the world of high finance, the company has been considered to be privately owned.
“An initial public offering is very important to a company that is looking at its business long-term, and realizes that the most certain way to place a value on the company is if there is an actively traded market for its shares. So when a company goes public, you have a better idea of what it is worth when a lot of investors are agreeing on its value as the shares trade. That enables a company to raise capital at an established valuation, sell the company or to provide liquidity to insiders who want to slowly diversify their ownership in the company that would sell shares into a liquid market where there is an agreed-upon value," she said.
Kathleen Smith is co-founder of Connecticut-based Renaissance Capital, which analyzes initial public offerings of companies looking to sell the stock to the public. She explains why an IPO can be crucial in the life of a corporation.With the first stock sale, planned for mid-May, Facebook will be publicly owned, although the original owners will also retain stock they can keep or sell for whatever their shares might be worth.
Some investors might buy only a few shares in an IPO, perhaps with a stock purchase costing only a few hundred dollars. With such a purchase, they will own only a very small portion of a company.
But large investors in major corporations like Facebook often own substantial portions of a business and can have a major say in how the company is run. Sometimes, as will likely be the case with Facebook, large investment companies buy stock worth millions of dollars.
The investment firms might be buying shares of the Facebook on behalf of wealthy individuals, or perhaps retirees or teachers or others who have pooled their money to make stock purchases.
The goal of all investors is to make money, to buy shares of a company’s stock in the hope that the business is well-managed and its profits grow. If that happens, the value of an individual investor’s stock could grow quickly.
But the opposite is also possible. If few people are interested in a company’s product, or if a company loses money, the value of its stock can diminish, even become worthless.
Business analyst Kathleen Smith says there are several reasons why the Facebook IPO has attracted widespread attention.
“There are a lot of users of Facebook and they are aware of the company and what it does. So there is an awareness of it. From the professional investor standpoint, many are in awe of how quickly the company has been able to achieve something like $5 billion in revenue, and is profitable, highly profitable, [in] such a short period of time. And it is likely to be, depending on its valuation, which some are saying could be between $75 [billion] and $100 billion, the most highly valued IPO that we have seen, ever. So it has attracted attention amongst the institutional investors, the pros, with how unique it is in terms of the significance to the IPO market," she said.
Facebook says the company could be valued at $96 billion and that the price of shares will be between $28 and $35. That initial share price is higher than for many first-time stock offerings. Nonetheless, Smith says, the Facebook IPO could draw interest from investors throughout the world.
“We would not be surprised directly to see investors that are not necessarily U.S., such as sovereign wealth funds, other international investors, who are interested in ownership of the publicly traded shares," she said.
Once Facebook is listed as a publicly traded company, its shares will rise or fall, depending on its financial performance and the other economic twists and turns that affect the world's stock markets.