The stock market ticker has a new symbol today.
Snapchat (SNAP) made its debut on Thursday, March 2, on the New York Stock Exchange with the largest tech initial public offering (IPO) since Twitter.
Snapchat IPO hits high
The Snapchat IPO raised over $3.4 billion. The company as a whole is valued at $22 billion. SNAP stocks opened at $24 a share — and are still growing. Not bad for a free app that doesn’t actually turn a profit yet. Most of this high valuation comes from investors’ excitement about Snapchat’s growth.
Since users first became obsessed with Snapchat five years ago, the social media company has seen astronomical growth. But does major user growth necessarily signal future revenue?
While it may be tempting to support your favorite app, here are five reasons you should wait before scooping up Snapchat stock.
1. New stocks are risky
IPOs, especially of unicorn tech companies like Snapchat, are met with a lot of a lot of fanfare. But the company’s trajectory might not live up to all that Snapchat hype.
Twitter stock, for instance, surged when its first entered public trading, but it has since plummeted by more than 20 percent.
Facebook saw an opposite trend when its stock price dropped on the first trading day. It took over a year to steady out and has been rising ever since.
The stock market is volatile by nature. Even though Snapchat stock soared by 45 percent in its first few hours, this trend may not last.
Before you get caught up in the excitement, remember that new stocks are risky, especially for beginning investors. Unless you have a ton of extra cash at your disposal, you’ll be risking valuable savings.
Before putting your financial future at risk, consider using your savings in more beneficial ways. Make sure you’ve got a handle on student loans or credit card debt.
Put aside earnings into an emergency fund, just in case. And set aside savings into a 401K or IRA to secure your financial future.
2. Popularity doesn’t necessarily mean profit
At this point, Snapchat is cruising along on popularity. Who doesn’t love to add rainbows and animal ears to selfies with their friends? Especially when you know your incriminating photos will soon vanish from the public record.
But user popularity doesn’t translate directly to profits. Facebook, for instance, used to be an ad-free service. If Snapchat goes in a similar direction, then the fundamental user experience of the app could change. And it could potentially lose users along with it.
Social tech companies like Snapchat, Facebook, and Twitter are relatively new on the stock market scene. Instead of pouring money into Snapchat stock, consider investing in a company with an established history.
To get started as an investor, you can open a brokerage account online in a matter of minutes. You can trade low-cost stocks and mutual funds with brokers like Charles Schwab, Fidelity, Scottrade, and eTrade. Or choose a robo-advisor, like Wealthfront or Betterment, to manage your stock portfolio for you.
3. ‘Buy what you know’ isn’t always the best advice
Legendary investor Warren Buffett advises people to invest in what they know. If you use Snapchat all the time, then you might assume you know the company well enough to invest.
What Buffett likely meant, though, is that you should understand the structure of the business. If you’re going to pick and choose individual stocks, choose a business where you understand its inner workings.
Beginning investors should follow a different piece of advice from Buffett. “A low-cost index fund is the most sensible equity investment for the great majority of investors,” he says.
Index funds hold many stocks, broadly diversified across an array of companies. Because they spread out your assets, you won’t suffer too much from any single loss. While you won’t become a millionaire overnight with an index fund, you’re likely to see more long-term growth.
4. It’s better to build a portfolio than buy individual stocks
Index funds are one way to build a diversified portfolio that invests your money in several different stocks. Exchange traded funds (ETFs) also spread your savings around.
Portfolios typically contain a mix of stocks, bonds, and assets. Their value will fluctuate over time along with the stock market as a whole.
Individual stocks, on the other hand, could change dramatically from one day to the next. With this idiosyncratic risk, you could wake up one day to find all your savings were gone.
Again, there are a number of investment advisors, like Wealthfront and Blooom, that will help you get started. When choosing, compare start-up fees, commission fees, and account minimums and go with the company that best fits your budget.
5. Long-term growth should be your focus
Let’s say you take Warren Buffett’s advice and invest in low-cost index funds. On average, these funds give returns of 12 percent each year.
If you started with an initial investment of $1,000, then you’d see $1,120 at the end of the year. If you invested $1,000 a year for five more years, you’d have over $8,800. After 15 years, your investment would have ballooned to over $47,000.
Even without increasing your annual contribution, you’ll earn money thanks to compound annual growth. And if you increase your investments, then you’ll see even more.
The earlier you can start, the better. Even if your contributions start out low, you’ll see far more savings if you start at age 25 than 35.
This same principle of longevity holds true for retirement accounts, like 401k’s and IRAs. Plus, these retirement savings accounts offer tax advantages that put even more money in your pocket.
Understand the risks before buying Snapchat stock
If you want to try your hand at investing in the stock market, make sure you understand the risks. By avoiding flashy new stocks like Snapchat, you can reduce the risks of investing in the stock market.
And if you still want to get in on the Snapchat stock feeding frenzy, wait to see if the high valuation lasts for more than 24 hours — unlike Snapchat stories.