A Beginner's Guide to Buying Facebook Stock

Suffice it to say, Facebook (FB) has had its ups and downs over the past year, and so has its stock price.

Ever since its initial public offering in May 2012, it has remained a high-profile company that consistently captures the public's imagination. A key member of the popular FAANG group of tech industry superstars that also includes Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOG), Facebook enjoyed an exceptionally strong and relatively smooth rise for years after its IPO.

Of course, the social media giant has not been exempt from problems, and they came to a head in 2018. Issues of serious concern had been building for years over Facebook's handling of user privacy and fake news, the company's implicit role in permitting the site's use by criminals and terrorists, and a user data breach of massive proportions.

Facebook experienced its most severe backlash for inadvertently assisting the now-defunct British political consulting firm Cambridge Analytica to data mine and exploit millions of user profiles that appear to have been misused to target political ads during the U.S. presidential election season and in the U.K.'s Brexit referendum campaign. 

Partly as a result of that personal data scandal, Facebook issued lower guidance for ad revenue in its July 2018 earnings report, which contributed to the company's stock plummeting by over 20% at one point. This marked the biggest drop ever for the stock. In fact, it was the largest loss of market value in the history of the U.S. stock market, at well more than $100 billion lost.

Despite these many troubles, a strong case might be made that the long-term outlook for the company remains positive. Such a case depends on how the company and its stock are analyzed.

With this guide, beginning investors should get a better idea at how to navigate through potential pitfalls and what to look for when considering investing in Facebook (FB) and similar stocks. Venturing into the stock market can be frightening, but every seasoned investor was once a beginner.

Before buying any stock, investors should perform due diligence to ensure that the company and stock have the potential to perform well. Due diligence can include different forms of analysis, the most basic being fundamental analysis and technical analysis.

• In fundamental analysis, the investor evaluates the intrinsic value of the stock by considering the overall economy and industry conditions as well as the finances and management of the company.
• Technical analysis uses statistics that include the stock's past prices and volume. Rather than looking at a company's intrinsic value, technical analysis focuses on identifying patterns and trends in the stock’s current and future price movements.

Fundamentally, investors should research the company’s financials. These can be found in its latest SEC filings. The company’s website should have an investor relations page. Financial sites like our own Investopedia also offer exceptionally useful company-specific information.

To make a case for buying Facebook stock, the investor should analyze ad revenue growth, including mobile growth, usage trends, risks to operations, and outlook and guidance. 

Also look at the trends for profit margins, total revenue, and monthly active users (MAU). Are these numbers going up, down, or sideways?

After doing one's due diligence and feeling comfortable with the decision to buy the stock, the investor should determine if the current price is an appropriate entry point. 

Fundamental analysts calculate valuation metrics to determine if the stock is undervalued (when the entry price is most attractive) or overvalued (investors may want to wait for the price to come down before buying the stock). The Price-Earnings Ratio (P/E Ratio) is the most common valuation metric, but there are many others. 

Source: Investopedia.com

The P/E ratio for Facebook is 21.42, as of March 1, 2019. In isolation, that doesn't tell the investor much. However, if it's compared to historical or industry P/E, it can determine how the stock is valued relative to its trends.

Another way to see if the stock price is at a good entry point is to look at its historical stock chart trends. Technical analysis looks at various aspects of price and volume to see if the stock is at a desirable level for entry.

Facebook's (FB) stock price trend since 2012 IPO. Source: TradingView

Once the investor determines that the stock is a good value at the current price, the next step is to calculate the number of shares to buy. Most online brokerages have a share calculator attached to their stock purchase process. Otherwise, the calculation is:

Total Amount Desired to Invest / Price per Share = Number of Shares to Purchase

The current price per share, which for Facebook is $162.89 as of March 1, 2019. (The current price can be found on any financial website such as Investopedia.com.)

For Facebook, if the total purchase amount is $10,000 at a price per share of $173.74, the investor can buy:

$10,000 / $162.89 = 61 shares 

A decision to invest in Facebook, or any stock, requires research and analysis. Investors should consider both the potential rewards and risks before buying stocks. Investing and trading are usually accomplished using a brokerage account. Those looking into brokers for trading may want to check out Investopedia's list of the best online stock brokers.