Edit ModuleShow Tags

Putting stock in Facebook


When Facebook went public in the largest IPO in U.S. history (as measured by market value), it provided some much-needed excitement for stocks and investing.

Aside from the hoopla, there are some valuable lessons to take from this IPO.

Stock investing pros and cons

A prudent investor should always have a “core” portfolio built with diverse mutual funds. Consider funds for at least 90-95 percent of your nest egg. Then you might explore individual stocks for some of the following reasons:

1. Potential rapid growth

An individual stock can move quickly. It is not unheard of for a stock to move up 20-50% or more in a few months. That happens occasionally with funds, but is more exceptional.

2. Tax control

If you own an individual stock that has gained in value, you might not sell for years. This will defer taxes and allow you to plan with your tax professional when best to realize gains.

Whereas in mutual funds, an investor can potentially lose value per share and still have a tax bill for the year.

3. Fewer fees...maybe

Individual stocks can be more fee-efficient than funds. If you buy a stock and hold for five years you typically pay just the commission going in and out. You have no internal annual fees.

What can bite investors is rapid trading. Changing your mind, finding an exciting new stock or other justifications can increase your trading costs. Besides paying extra commissions, this might result in selling at a loss. A double whammy.

These are some benefits of individual stocks. Here is the other side of the proverbial coin.

1. Enron-scale losses

Just as stocks can rise rapidly, they can fall just as quickly. Potentially, they can go to zero. Or worse. If an investor used margin (borrowed against their stock), then the losses can get bigger. This recently happened to the billionaire founder of Green Mountain Coffee. His stock dropped and he got a $100-million-plus bill, forcing him to sell.

2. Less diversity

Using Enron as an example again, would you rather have had all of your nest egg in Enron stock? Or in a diverse mutual fund that owned Enron and 99 other major U.S. companies? That is a no-brainer.

3. Amateur management

Mutual funds offer professional management. For a small fee you can hire the best and brightest money managers on the planet. With individual stocks you are usually on your own or have limited resources compared to institutional managers.

Only time will tell what will happen to Facebook and their popular stock. I hope everyone makes plenty of money from it. Invest wisely.

Edit Module
Ron Phillips

Ron Phillips is an Independent Financial Advisor and a Pueblo, Colorado native. He and his wife are currently raising their two sons in Pueblo. Order a free copy of his book "Investing To Win" by visiting www.RetireIQ.info or leaving a message on his prerecorded voicemail at 924-5070. Simply mention Promo Code #1001 when ordering.

Get more of our current issue | Subscribe to the magazine | Get our Free e-newsletter

Edit ModuleShow Tags

Archive »Related Articles

If you played ball as a kid, you won't like this

Let’s clamber into the time machine, sports fans, and punch in the coordinates: Tuesday afternoon, June 1971, a ballpark near Arvada’s Allendale Elementary. Back then, most kids played ball. Or at least it seemed that way.

This $100,000 Lexus will make you feel like a million bucks

The truth is this: There is nothing economical about this vehicle. It is a pure indulgence, plain and simple, but it is one of the most magnificent vehicles I have ever driven.

Colorado Companies to Watch 2016 explore new frontiers

Given the state of parking in any big city, it’s tough to believe there are actually more than 100 million parking spaces nationwide. The problem, Parkifi founders Ryan Sullivan and Rishi Malik discovered, was a lack of data.
Edit ModuleShow Tags

Thanks for contributing to our community-- please keep your comments in good taste and appropriate for our business professional readers.

Add your comment: