The Twitter IPO is not for you

Twitter IPOTwitter will hold its Initial Public Offering (IPO) on Thursday to great anticipation. Hopefully (for them, at least) this will go better than the Facebook IPO both on the technical side and on the price side. No matter which way it goes, though, the Twitter IPO is not for you.

Now, if you are interested in buying a share of TWTR just to say you have one, then more power to you. If, however, you plan on making money buying and selling this stock, stay away on Thursday.

IPOs are held, the economists will tell you, for one reason: to raise capital for a maturing corporation that wants to grow. Presumably, they are beyond the phase where individual investors can contribute meaningfully and they can’t wait for natural growth/reinvestment to work its magic. While that’s mostly accurate, it’s incomplete. It’s not even necessarily the primary reason for an IPO any more.

In reality, there are three reasons to have an IPO. Two of them are about making people rich. None of them are about making individual investors (that’s you) rich.

First, it’s important to remember that just because this is the initial public offering doesn’t mean that there aren’t outstanding shares. Those initial private investors stand to make a killing turning their shares into dollars. Among those investors are, of course, the founders and early employees. It seems somewhat fair that they should get paid for their efforts.

The other group that stands to make a killing on Thursday’s Twitter IPO are the banks underwriting the offering—they make piles of money no matter which way the stock goes. Now, the system does have some checks in it, if the price dips too far, they don’t make as much money (because, clearly, they priced the IPO too high and/or didn’t drum up enough buyers) and if the price jumps too far, they didn’t make enough money for the company (and private shareholders). The bank target is for a 10% bump on day one.

So, are you one of the Twitter insiders who already owns a bunch of shares? Are you an investment banker? If not, don’t expect to make any money on Thursday. In fact, no one should expect to make more than 10% even if you get in at the initial offered price—something that is exceedingly unlikely unless you are a large institutional investor—because that’s all you’re supposed to make.

Wait this out. See where share prices go through Friday evening, then make a decision on TWTR based on longer-term prospects and, dare I say, fundamentals.