Breakout

The Right & Wrong Ways to Buy Facebook

Jeff Macke
Breakout

After months of hype Facebook (FB) is expected to become a publicly traded stock at the end of this week. The richly valued company may not be for every investor, but those who've decided they need to own shares of the social media giant should know the right and wrong ways to buy the next hot stock. The frenzy surrounding any highly anticipated IPO can lead investors into mistakes that cost them real money. Josh Brown, author of Backstage Wall Street and editor of theReformedBroker.com, has some tips on how to buy Facebook shares.

1. Avoid "Facebook Funds"

Contrary to what you might hear, the funds and companies that already have Facebook stakes aren't likely to suddenly shoot up in value when the stock starts trading. Don't believe anyone who tells you to buy some company that either has an investment in or is "like" Facebook. Stick to the real deal.

"Avoid any kind of indirect way of owning it, just own it," Brown emphasizes. That's what the company going public is all about.

2. Use a Limit Order

Placing a limit order means you're setting a ceiling on how much you'll pay per share. This is in contrast to a market order where you buy stock at any price.

If you place a market order, you end up owning shares wherever the stock is trading at that very instant. On the first day of trading for a hot IPO, swings of 25% or more aren't uncommon. Obviously you don't want to be at the high end of that range.

The success or failure of your Facebook investment may ride on deciding in advance how much you're willing to pay per share. The best way to do that is by placing a limit order.

3. Only Use Your Risk Money

Facebook is an exciting company, but the potential share price—targeted to price between $28 to $35 each—already reflects some of that enthusiasm. You shouldn't put all your eggs in one basket under any circumstance, especially for a hot IPO.

"This is not the money you're going to use in two years to buy a house!" cautions Brown. A controlled investment is one where "if you're wrong and it gets cut in half, you won't be happy, but it won't change the way you live."

4. Don't Buy at the Open

Brown says in a lot of cases company insiders can sell their shares three to six months after a company goes public. When that supply of stock comes flooding onto the market, stocks can take a temporary hit, making it an ideal time for outsiders to scoop up shares.

"In Facebook's case, I'm not 100% sure that the insiders are going to come out with that many shares to sell," says Brown. In other words, even though he thinks investors need to know they are "grossly overpaying" for shares, they need to start buying the right way.

Following the steps above won't make owning Facebook any less risky than buying shares of any other stock, but they should help you to not get burned on the first day. In this case, having a precise plan may make all the difference to make money on your investment.

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