After the biggest and most-covered IPO in American history last May, Facebook has had a difficult time with its stock ever since. The latest drop happened yesterday, when the stock fell more than 6 percent after early investors became eligible to sell some of their stock. Exactly why that happened can serve as a constructive lesson about today's IPO landscape.
Companies that go public typically ask their early investors to refrain from selling shares until a certain period of time has passed - in this case, it has now been three months since the IPO. The thinking is that if the market gets flooded with shares, it can lower the price, which is exactly what happened here. With a sudden addition of 271 million Facebook shares to the market, there weren't enough buyers for the stock, which results in a drop in price.
This is just the first wave of early-investor selling, though; there is another group of shares that can potentially go on the market in November, and more will be appearing through next May. It's important to realize, though, that this isn't necessarily Facebook "insiders" who are selling shares, people who might have insight into the inner workings of the company. Much of the shares sold yesterday belonged to Goldman Sachs and other institutional owners.
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