Google's IPO Will Introduce the Stock Market to Thousands of Small Investors and Drive the Price of the Stock to It's True Value
By Al Berrios (contact Al Berrios)
Google's recently announced initial public offering will be done two ways: using investment banks and direct-to-consumer auctioning of shares via their site. With Google commanding the consumer-friendly brand it does, consumers will indeed want to take a chance with owning a piece of it. Imagine, a search site for everyone, owned by everyone. It's revolutionary indeed.
So what will be the ramifications of such an event? With thousands of new investors entering the stock market, demand for more stocks will spur more IPOs; rules governing investor communications will alter to accommodate the internet's more cost effective role in that communication; clearer language and more transparent financial reports will become easier to access; but most importantly, companies will finally recognize the value of wide-ownership by legions of individual small investors - a share's true value will not only be realized, but it will be higher than it would be without this wide-ownership.
The comparison below shows that a company doesn't necessarily have to be widely owned to be successful:
WMT (Wal-Mart) = 37% owned
by institutional; Forward P/E (1 yr): 20.86
S (Sears) = 81% owned by institutional; Forward P/E (1 yr): 9.43
TGT (Target) = 86% owned by institutional; Forward P/E (1 yr): 16.82
JCP (JCPenny) = 90% owned by institutional; Forward P/E (1 yr): 12.74
SBC (SBC Communications)
= 52% owned by institutional; Forward P/E (1 yr): 20.35
BLS (BellSouth) = 54% owned by institutional; Forward P/E (1 yr): 15.18
VZ (Verizon) = 54% owned by institutional; Forward P/E (1 yr): 14.96
T (AT&T) = 72% owned by institutional; Forward P/E (1 yr): 22.19
NXTL (Nextel) = 76% owned by institutional; Forward P/E (1 yr): 11.11
However, the benefit of wide ownership is clearly an increase in the value of a share since lots of small investors bid up the price of all available shares (it's not illogical that small buyers increase the value, since small buyers compete with the large institutional shareholders, and this natural market competition will consequently result in a higher price for the stock overall).
Contrary to the law of
supply and demand, high ownership of stocks by institutional shareholders (not
willing to pay a high price for their shares and ultimately killing competition
for their holdings) doesn't necessarily increase the value of the remaining
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