Buying Facebook Stock: A Guide for Beginners
How to assess whether it’s a good fit for your portfolio
Facebook is a very high-profile public company, boasting more 2.4 billion users worldwide on its social media platform. The company generated more than $17 billion in revenue in the third quarter of 2019, so there’s no surprise that it’s a popular investment.
Anyone who invested in Facebook when it went public in 2012 has seen their money double twice in the ensuing years, even despite a slow start and some negative headlines along the way.
As of December 2019, shares of Facebook were trading around $200, up from about $120 at the start of 2017.
If you’re looking to invest in a high-growth company, or admire the social media platform, buying shares of Facebook stock may seem appealing. It’s a commonly traded stock, so you should have no trouble buying and selling shares through any major online discount brokerage such as Charles Schwab, E-Trade, Fidelity, or TD Ameritrade. However, the company isn’t the right fit for every portfolio.
While no one can predict whether a stock will go up or down, here are some things you should be aware of before investing your money.
It’s Not Cheap
As of December 2019, one share of Facebook stock hovered in the range of $200. That’s a sizable chunk of change for a single share of stock.
That doesn’t mean the stock is overpriced, however. Experienced investors look at a company’s share price in the context of earnings. This price-to-earnings (P/E) ratio is calculated by taking the company’s earnings per share and dividing it by the stock price.
As of December 2019, Facebook’s P/E ratio was about 27. Many tech companies have higher P/E ratios (above 20) because there is a strong expectation of growth. That puts Facebook’s P/E ratio on the high side, but not to an extreme level. As of December 2019, Apple had a P/E ratio of about 22, Google had a ratio of about 26, and Amazon’s P/E ratio was about 87.
Facebook may be a social media company in the communications industry but is often lumped in with other new technology-driven organizations such as Google, Amazon, Apple, and Netflix (often known as “FAANG stocks”). These companies tend to grow fast but can also have some wild price swings. This may be especially true of Facebook because, as a high-profile company, it has been in the news several times.
You can examine Facebook’s volatility by looking at a figure called “beta.” This is a measure of how much a stock goes up and down compared to a relevant benchmark. A measure of 1.0 means it has the same volatility as the S&P 500, while a higher number means it is more volatile. As of December 2019, Facebook showed a beta figure of 1.06, meaning that it’s just slightly more volatile than the S&P 500.
Volatility isn’t necessarily bad by itself, but not every investor can handle seeing prices go up and down. If you do invest in Facebook, it may be best to avoid looking at the daily price changes and avoid worrying about whether you are making money in the short term.
Facebook has made a lot of money for investors, but it got off to a rocky start. Despite the considerable hype surrounding its 2012 initial public offering, it was initially a disappointment. Technical problems prevented some orders from going through, and the stock price, which began at $38, rose just 23 cents on its first day on May 18, 2012. Shares fell to well below $30 for more than two months, and it would be over a year before shareholders started to see significant gains.
It Doesn’t Pay a Dividend
Facebook is a growth stock, and while it may want to expand quickly and see larger and larger revenue and profit growth, quarter after quarter, all its profits are invested back into the company to fuel its growth. That means it does not distribute any money to shareholders in the form of dividends.
As an investor, you need to be comfortable knowing that money is going back into the company with the aim of growing revenue and, potentially, a higher value for your shares. Understand, however, that Facebook shares may not—at least for the time being—be a source of passive income.
Is eschewing dividend income in favor of the potential for faster growth a smart move? That depends on your financial goals and investment timeline. Generally speaking, if you are far away from retirement and are investing for the long-term, you should be okay with a growth stock that avoids dividends. However, if the company is not paying dividends but is also growing slower than you’d like, perhaps it’s time to take your money elsewhere.
You May Own the Stock Already
If you purchase shares of a mutual fund or exchange-traded fund (ETF), especially one that follows the S&P 500 or the broader stock market, you are probably already investing in Facebook, at least indirectly.
Facebook is one of the top 10 companies in the world by market capitalization, so most major mutual funds invest in the company. The Vanguard 500 Index Fund (VFINX), for example, tracks the S&P 500 and invests about 1.8% of the portfolio in Facebook. The iShares Core S&P Total U.S. Stock Market invests about 1.55% of its holdings in Facebook. There are many other tech-focused funds and ETFs that may offer even greater exposure to the company.
Mutual funds and ETFs offer a way to invest money in the company without exposing yourself to the risk of an often-volatile stock holding.
The Bottom Line
Facebook is a big company with billions of users, that generates billions of dollars in revenue. It has made a lot of money for investors since going public in 2012, though it’s had its share of down time. Facebook is a relatively volatile stock, so investors should be comfortable with some ups and downs in the share price.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
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