Facebook IPO: What is an IPO and What Does It Mean for Facebook


For those not in the financial industry or familiar with stock market-related lingo, "IPO" might sound like a bad European death metal band, or a knockoff of a popular American pancake restaurant. However, this IPO may well be the biggest thing to happen to the Internet, and it may change the face of the technological industry as a whole.

Or, it might flop.

An Initial Public Offering, or IPO, is when a company first goes public and issues stock certificates, or ownership interest, in that company. Every company traded on the stock market, whether the Dow Industrial index, the S&P 500, the NYSE, the NASDAQ, or a foreign exchange, will go through an IPO to begin its life as a publicly-traded company.

The process is quite complex, but in a nutshell, the company decides what it thinks it's worth, and then tries to sell its stock at a certain price to raise the amount of money they think they need for capital investments or to pay off private investors. However, the problem is that a company never knows how highly it will be valued on the market, which means that it may overprice its stock, leading to low sales and a bad image (first impressions, right?). Or, the company may undervalue its stock, leading to lost potential earnings from its offering.

Facebook's IPO is different, however, since Mark Zuckerberg & Co. have estimated the worth of their brainchild at a rather staggering $100 billion (later reduced to a much more reasonable $96 billion ... but then revised higher). If successful, this will rank as the largest Internet IPO in history, as well as one of the largest IPOs in any industry. 

However, to your potential disappointment, you're not going to be able to get in on the sale through eTrade or your friendly local stockbroker. IPOs are exclusive events that are typically reserved for deep-pocketed mutual fund companies, like Berkshire Hathaway, and other large institutions, as well as the customers of the firms underwriting the IPO.

The conundrum arises form the fact that the going price of stocks typically fluctuates wildly upon their release. For instance, Facebook's target price is currently $34-$38 per share, which isn't too bad for a tech stock, but depending on investor confidence, that price may rise rapidly, providing a "stag profit" for early adopters, or the share price could plummet, leaving initial investors high and dry.

As it stands, Facebook's IPO is unusual, especially in the tech industry, since many companies try to go public as soon as possible and seek to raise funds right away. In the case of Zuckerberg & Co., however, they waited until they were basically forced to go public. Considering that they were able to write a $1 billion check for Instagram (since put on hold), FB, as it will be traded on the NASDAQ, hardly needs the capital they will raise from this offering. Yet going public will allow Facebook to become an even greater power in the tech sector, and fulfill the idea that Facebook, and not Bing, Yahoo, Amazon, or even Apple, is the biggest threat to Google's search-based empire.