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Category Archive: Personal Finance

May 28

The Facebook Listing Story – Personal Finance Series

Last week week saw the greatly anticipated listing of Facebook (the most popular social networking firm) shares on NASDAQ. Unfortunately for many investors this was a great disappointment. This article analyses and simplifies the reasons behind the same. Let us start by understanding the term listing.

Q1) What does the word listing stand for?

Ans. 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, a stock exchange in the United States. Thus one can now buy and sell shares of Facebook on NASDAQ. Listing is the end process of IPO.

Q2) What does the term IPO stand for?

Ans. 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 as it is 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 the original demand from investors for Facebook’s shares was so strong that the IPO size was increased by about 25% than originally planned. Also the price band of the shares was increased due to the strong demand.

Q3) What is price band of a share?

Ans. In simple terms, price band essentially refers to the price range at which shares are issued in an IPO. Price band consists of floor price and ceiling price. 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 a very rich valuation.

Q4) What was the valuation of Facebook?

Ans. This price of 38 dollars per share gave Facebook a stupendous valuation of 104 billion dollars. This valuation rivals the market value of internet power houses like Amazon. In fact it exceeds the combined value of Hewlett Packard Co and Dell Inc. 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.

Q5) What happened when Facebook shares started trading on NASDAQ?

Ans. 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, the prices of the shares started falling during the first 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 by 18% leading to huge losses to investors who lost nearly 19 billion dollars.

Q6) What were the reasons for this rapid fall in Facebook’s share prices?

Ans. 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. This led to there being hardly any buyers on Nasdaq for Facebook’s shares while there were many sellers. Technical problems at Nasdaq (an US Stock Exchange) further aggravated the fall in prices.

Q7) What were the technical problems at Nasdaq?

Ans. 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 forecast for revenue growth made by Morgan Stanley the main banker to this issue.

Q8) Why did Morgan Stanley lower the revenue estimate of Facebook?

Ans. Morgan’s Stanley’s internet analyst Mr. Scott Devitt reduced the revenue forecasts for the company. This lowered forecast was totally unexpected and was made just before the end of the IPO process. This change in estimates came on the heels of Facebook’s filing of an amended prospectus in which the company expressed caution about revenue growth due to a rapid shift by users to mobile devices. It is to be noted that this is unprecedented and unexpected. Also it is unclear if Morgan Stanley told only its top clients about the revised lower view or spread the word more broadly. All in all this confusion led to a panic among some investors who tried to sell Facebook’s shares on listing.

Q9) Who are the main losers?

Ans. All the investors who purchased Facebook’s shares at 38 dollars are losers. Unfortunately again small retail investors who were allotted 25% of the total issue are one of the main losers. Retail investors have collectively lost about 600 million dollars as on date.

Q10) What is the future of Facebook’s shares?

Ans. Currently Morgan Stanley is trying to support the price at the listing price of 38 dollars by buying Facebook’s shares. Many analysts believe that Morgan Stanley is doing so to essentially to refute the allegation that it had overpriced the shares. However it remains to be seen how long they would support the share prices. The coming weeks will see a lot of action in Facebook’s shares. Meanwhile already two law suits have been filed in New York and California alleging that Facebook and its bankers have deliberately misled investors.

Synopsis of Article

  • Facebook recently concluded its much hyped Initial Public Offering (IPO)
  • Its shares were issued at 38 dollars per share and were to be listed on Nasdaq (an US Stock Exchange). This gave Facebook a rich valuation of 104 billion dollars.
  • Share prices of Facebook decreased once trading commenced on Nasdaq. Investors suffered huge losses to the tune of 19%. Falling below the offer price so quickly is considered very disappointing for a newly listed stock.
  • High valuations, high number of shares, technical glitches on Nasdaq and finally lower revenue forecasts are the main reasons for this fall. In fact many analysts believe that in case shares were issued at about 25 dollars per share, all investors would have gained.
  • All Investors including retail investors who purchased the shares at 38 dollars per share have suffered heavily. Once again investors are attributing their losses to poor disclosures and greed of the bankers who managed Facebook’s issue.
  • It is pertinent to note that all the bankers who managed Facebook’s issue have earned 176 million dollars in fees. Also all investors who purchased Facebook’s shares earlier at significantly lower prices have made money. This includes Goldman Sachs one of the bankers, which raised 235 million dollars after selling its Facebook shares at a valuation of more than twice the 50 billion levels at which the firm made its December 2010 investment. The funds that Goldman manages for its clients raised a further 855 million.
  • At least 3 regulatory enquiries are underway and two class action legal suits have already been filed alleging that Facebook and investment bankers misled investors.

This article has been written by Dr. Anil Menon . Dr.Menon believes that Finance is Logic. He is of the firm opinion that everyone can understand and apply financial concepts. His previous articles and lecture videos are available at www.simplifiedfinance.net He can be contacted at [email protected]

Copyright secured by Digiprove © 2012-2013 Jappreet Sethi

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Oct 29

How To Tackle Financial Stress

Financial stress can adversely affect a persons’ psychological state. This negative psychological state has a tendency to percolate down to the affected person’s workplace and – in fact – into all social interactions. Surveys have shown that financial stress is among the root causes of decreased performance at work and a steady decline in physical and mental wellbeing.

CAUSES OF FINANCIAL STRESS

The sources of financial stress are varied. In India, one of main causes is worry about the adequacy of retirement savings. Debt is yet another significant causative factor, as is worry about one’s ability to pay regular bills and housing loan installments. Most middle-class people in India are also under considerable stress related to their children’s education. Almost 90% of all survey subjects indicated that they experience stress over the rate of inflation and the resultant changes in interest rate, and the fact that their pay packets are not keeping pace with it.

An adjunct is stress created by joblessness or the fear of losing one’s job – which would create a financial deficit. A smaller segment of the Indian population experiences stress because they fear losing wealth that they have accumulated.

Lack of objectivity with the use of credit card can also cause stressful situations. Credit cards are a relatively new phenomenon in India, and many users tend to overspend with them. The financial woe this results in can be attributed to a lack of knowledge about credit card billing, hidden clauses and neglecting to read the fine print.

In the age of plastic money, people are tempted to overspend and misinterpret their spending power. A credit card purchase does not entail immediate payment and this can lead to a false sense of security. The result is invariably a lot of stress. The roots of most finance-related stress disorders are two-fold – lack of proper planning and a disconnection with the of one’s true financial position and future prospects.

DETRIMENTS OF FINANCIAL STRESS

Is financial stress itself a serious matter? If we consider that 80-90% of all ailments derive from stress, it certainly is. It has been proved that worrying excessively about one’s finances leads to heart disease, high blood pressure and in some cases alcohol and drug abuse. Depression related to haywire finances is almost a national mantra in India now. Financial stress also has peripheral bad effects, meaning that it causes absenteeism and reduces am employee’s productivity.

TACKING FINANCIAL STRESS

One of the baseline commandments in financial stress management is – get help. Finances are a serious matter and no single person can have perfect oversight. Moreover, we tend to become stuck in false belief systems about money. For instance, we may believe that a certain investment scheme is the best only because we have no knowledge of other schemes. Effective financial management calls for inside information into market dynamics and changing laws.

Complacency about deteriorating finances is a known ‘killer’. We tend to ignore the increasing seriousness of a situation, allowing it to build up until it is unmanageable. People dealing with large amounts of money – such as businesspersons – should consult a qualified financial adviser.

Even at the grassroots level of household finances, two heads are better than one. Managing household finances is teamwork, not a one-man show. Couples need to communicate with each other over the state of household finances. They must also set weekly, monthly and yearly parameters for what needs to be purchased or invested in. Doing this will considerably reduce the levels of finance-related stress in the family.

Regardless of how serious a financial situation is, it is never too late to get organized. Organization is they primary key for sorting out complicated finances. Effective organization calls for inputs from others and, when required, from experts.

BRINGING DOWN FINANCIAL STRESS

If one is already under stress from financial problems, planning is an extremely important factor. Often, one is tempted to throw good money after bad in hope of a quick-fix solution. When one is faced with financial stress, there are certain ground rules to follow:

  • Consult a professional financial adviser – A professional will know of ways and means that you are not aware of
  • Curtail spending until the crisis is resolved – This is no time for impulse buying as a stress-busting measure
  • If in debt, talk to your creditors and explain your situation frankly – Perfect transparency in such situation is a far better tool than evasion

OBJECTIVITY – THE ULTIMATE STRESS-BUSTER

We tend to run away from money-related problems rather than facing up to them. This is not even a temporary solution. The minute we accept such a situation squarely, we reduce stress because we are no longer trying to escape.

Getting proactive about tackling financial problems means one develops a ‘game plan’. This means positive action rather than negative inaction, which displaces the anxious feeling of helplessness. To develop a game plan, we involve the help and advice of others. In other words, we are no longer alone in the stress-inducing situation and are strengthened in a situation where we feel impotent and weak.

Jappreet Sethi

Copyright secured by Digiprove © 2011 Jappreet Sethi

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Sep 03

How To Give Yourself A Salary Hike

It’s not really certain which way the economy is heading right now, and saving money from your salary may currently figure high on your priority list. It should, because it looks like the global economy may go through more frequent and deeper recession cycles over the next decade.

This would mean that the regular yearly pay raises you may have been counting on could be out of window. There may be years of high payment and years of low or no bonuses. To add to the working joe’s woes, housing loan EMIs have risen astronomically in last 18 months. These are uncertain times for the middle-income group.

You’ve read enough about how companies can cut costs in such a scenario. As a salaried employee, you may even be feeling the pinch of some of those cost-cutting measures, yourself. What about you? If your monthly package just doesn’t seem to cut it even now and the increment scenario is uncertain, how do you manage? The best way is to give yourself a salary hike. This simply means becoming more savings-oriented and making your salary last longer.

You may be among those who have not already put certain important saving mechanisms in place. If so, it is high time that you did. This article will provide some practical advice on how to save money from your salary. Let’s start off with your debt burden and debt-inducing habits.

To begin with, stop using your credit card for anything but important online purchases – especially if it comes from the same bank that handles your salary account in. Banks managing companies’ salary accounts usually press a credit card on every employee as a direct incentive for reckless spending. They know that employees often tend to treat their salary accounts like Horns of Plenty that never really run dry.

Avoid personal loans. The high interest rates are not the only reason – the habit of taking personal loans to bail out of financial crises is an extremely self-sabotaging one. The personal loan system is simply not geared to work in your favour, so steer clear of it. If you need money before payday, ask for an advance or borrow it from friends or colleagues – as a last resort only. Ideally, you should not be in such a situation in the first place.

Now let’s talk about what you have in hand. First of all, don’t underestimate the power of small currency. You would be surprised at how much the stray cash in your wallet – and even the small change – can add up to at the end of the month. Try it out. Put every form of low-denomination currency in a designated container at the end of each day. Count it at the end of the month and see for yourself if it can pay at least one of those recurring monthly bills, such as the Internet or cable TV charges.

What about your monthly outgoings on entertainment? Are there cheaper options available? Most of the world’s stressed-out executives choose the quickest (read costliest) forms of personal and family entertainment. Do you really need to go bowling at that fancy new arcade? Do you really need to pay a premium for the privilege of booking those cinema tickets online? Can you live without ordering out for unhealthy fast food? Is spending enormous amounts on at the local amusement arcade the only way to keep your child occupied on weekends?

Invariably, the cheaper alternatives are not only more cost-effective but also more wholesome and rewarding. Included are all the things that the availability of instant entertainment keeps us away from – such as an evening walk or jog, a visit to friends or family and checking out a museum or art gallery. You may discover – like thousands of others the world over have – that making a decision to live cheaper also enriches your social life and improves your health.

Finally, let’s look at the essentials of daily living. As a mid-management person in your company, you may perceive it as being below your ‘standard’ to shop for your groceries and toiletries at Big Bazaar. Is there any sound logic to support this mind-set? Some of the richest people on earth attribute at least some of their good fortune to the fact that they did not lift their noses at bargains, discounts and bulk purchase savings.

Have the advertising world or a false sense of ‘upper middle-class’ dignity lured you into artificial lifestyle choices? Even if you are sometimes judged by the make of your shirt, nobody cares where you bought it. Moreover, where you buy your rice or razor blades from should certainly not be a ‘prestige point’. If you have fallen for the misconception that you are only as good as the places you shop in, correct the course now. The potential savings are very significant.

Jappreet Sethi

Copyright secured by Digiprove © 2011 Jappreet Sethi

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