This week saw the greatly anticipated listing of Facebook ( the most popular social networking firm) shares on NASDAQ. Unfortunately for many this was a great disappointment. This article analyses and simplifies the reasons behind the same.
What does the word listing stand for? The term listing means to get listed on a stock exchange.
( Stock exchange is a place where shares are purchased and sold). Once a firm get listed on a stock exchange, its shares can be freely purchased and sold by investors. In this current case of Facebook, its shares are listed on NASDAQ. Thus one can now buy and sell shares of Facebook on NASDAQ. Listing is the end process of IPO. What does the term IPO stand for? IPO stands for Initial Public Offer. It is a process by which a Company gets listed on a stock exchange. The IPO by Facebook had attracted a lot of attention and in fact was the third largest IPO ever in the United States after Visa Inc and General Motors. Facebook raised more than 16 billion dollars through this IPO. In fact demand for Facebooks shares from investors was so strong that the IPO size was increased by about 25% than originally planned.
Also price band of the shares was increased due to the strong demand.
What is price band of a share? In simple terms, price band essentially refers to the range of prices at which shares are issued in an IPO. The minimum price at which shares are issued is called the floor price, while the maximum price at which the shares are issued is called ceiling price. ( This is logically as the reader would note that in a room, floor is always at the bottom while ceiling is always at the top). In case of Facebook, the initial price band planned was $ 28 – $ 35 per share. However due to strong demand, the price band was revised upwards to $ 34 – $ 38 per share. Finally the shares were issued at the ceiling price of 38 dollars per share giving Facebook high valuations.
What was the valuation of Facebook? This price of 38 dollars per share gave Facebook a stupendous valuation of 104 billion dollars. To give the readers a perspective, this valuation is roughly 10% of the GDP of the whole of India and is more than the GDP of many African nations.
Also this expected valuation is nearly twice the money Indians spent buying bread and cereals last year. Unfortunately it is these very high valuations which led to a debacle when Facebook shares started trading on NASDAQ. What happened when Facebook shares started trading on NASDAQ? As was mentioned earlier the shares of Facebook were issued at a price of 38 dollars per share. When the shares of Facebook started trading on NASDAQ on May 18, its price opened at 38 dollars and then started falling during the day itself. In fact the price decreased to 34 dollars on May 21st and further fell to 31 dollars the next day.
Thus within 3 to 4 days of start of trading the stock decreased nearly 18% leading to huge losses to investors who lost nearly 19 billion dollars.
What were the reasons for this rapid fall in Facebooks share prices? One of the main reasons as explained earlier was high valuations of the shares. Analysts also believe that the high number of shares issued ( nearly 421 million shares) also contributed to the fall in prices.
Investor appetite decreased once such high numbers of shares were issued. Technical problems at Nasdaq ( an US Stock Exchange) further aggravated the fall in prices.
What were the technical problems at Nasdaq? Opening of trading on Nasdaq was delayed by about 30 minutes due to technical glitches. Also orders were wrongly executed for 30 million shares.
Due to these technical problems small investors suffered estimated losses of over 100 million dollars as they were unable to buy & sell Facebook shares at prices they wanted to.
Blaming high volume of shares for all its technical problems Nasdaq has now set aside 13 million dollars towards legal liabilities. Another reason was the lower foreca