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Stock Valuation For An IPO

By Amy E. Feldman

PHILADELPHIA (CBS) - How do financial experts know how much a stock should cost when a company goes public?

So much about Facebook is a mystery. Like why I care why a woman I barely know thinks she needs to tell me that it's kind of a blah day. Or how exactly it was determined that when Facebook went public, it cost exactly $42.50 (and then started dropping almost immediately)?

Actually, the former question is unfathomable, the latter, though, has an answer.

A company can "go public" - in other words, open its ownership up to the world - by listing itself on a stock market. When it first lists its shares for sale in the process, called the initial public offering, underwriters figure out a price that would be alluring to investors. And to do that, they look at a company's financial statements, growth projections, and profitability. They'll also look at other comparable companies to see how they are valued.

But they also look at marketability and demand. And sometimes those factors outweigh the financial facts of a company, as underwriters thought investors would have a Facebook buying frenzy, which didn't happen, making it a blah day for Facebook investors.

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