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How To Value The $100B Facebook IPO

You must be living inside the GRID if you haven’t heard about the Facebook IPO. There’s a good chance you don’t know what an IPO is or where the $100B value that places keep mentioning comes from. So let’s talk about how to value a publicly traded company, or in this case, how to value the Facebook IPO.

An IPO is the “Initial Public Offering” of a company that will begin trading on the secondary market (the Dow Jones or NASDAQ).
The share estimates of the number of shares that will be available in the Facebook initial offering is about 2.6 million shares.

A publicly traded company is a company whose stock is traded on the stock market. A stock is a piece of the company; by owning a stock or share in a company you effectively own a piece of that company. However, that ownership doesn’t give you any rights to control the company or even rights to the money made by the company. The only return you get from the stock is either dividends or the gain in stock price from the time you buy a stock. So if you buy a $10 stock and one year later the stock is trading at $20, then you could make a $10 share profit if you sold the share on the market.

So where does the market value of a stock come from? Well, the market value is the value the stock market gives the company. It’s a mathematical calculation that is determined by the company’s current stock price multiplied by the number of shares a company has on the secondary market (stock market). The more the market values the stock and the more demand for a stock by buyers, the higher the price for the stock will be. Likewise, lower demand for a stock reduces the price. With Facebook releasing 2.6 million shares into the market, based from the $100 billion estimates, we can actually find what the stock will be trading for as soon as it hits the market (demand will cause the price to either rise or fall on the first day of trading).

100 billion / 2.6 million = $38.46/share (number not exact, but based off estimates of IPO)

So the market value ($100 billion Facebook value) of the company will fluctuate daily based off the stock price in the market. If the price of the stock goes up, then so does the market value, and vice versa if the price/demand for the stock falls.

Need more help understanding? Feel free to comment or ask questions.

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