Twitter tweeted September 12 that it had filed its S-1 registration statement with the SEC. The filing signals its intention to go public. Whatever its IPO price you know it's going to be extremely popular with institutions and big-time investors alike. 

Saudi billionaire Prince Alwaleed bin Talal, who owns $300 million of its stock, expects Twitter’s IPO later this year or early in 2014. He believes Twitter won't make the same mistakes Facebook (Nasdaq:FB) did and will price its stock realistically.  Ordinary investors, who will have a hard time laying their hands on some of its IPO shares, are faced with the difficult decision of whether to purchase its stock once Twitter opens for trading.

Rather than stress about this, I’ve got three ways you can get in the back door.

Option One

If you're Michael Moe of San Francisco-based GSV Capital (Nasdaq:GSVC), this news is music to your ears. GSV owns 1.84 million common shares of the social media messaging service, which it paid $33 million for ($18 per share) over a 12-month period between Q3 2011 and the Q2 2012. Recently these shares have traded between $20 and $30 on the secondary market. At the high-end, GSV is sitting on a $22 million unrealized gain. Twitter, which represents 15% of its overall investment portfolio, is far more important to the company than Facebook was when it went public in May 2012, and that debacle cut GSV's market cap by more than half in little more than two months. Any hiccup in Twitter's IPO could drop GSV's stock to single digits.

This is definitely the riskiest of my three options but also likely provides the most upside.  

Option Two

Jay Ritter is a University of Florida professor who specializes in IPOs. He speculates that Twitter will likely make available 20% of the shares sold for individual investors. You'll still have to fight like heck to get your paws on a few hundred shares. That's the hard way. The alternative is to buy an ETF that already holds social media stocks and will likely add Twitter to its holdings in due course once the IPOs priced and trading. 

The second option is the First Trust US IPO Index Fund (NYSE:FPX), a semi-passive ETF that seeks to replicate the performance of the IPOX-100 US Index, which is 100 of the best performing and most liquid US public offerings in the IPOX Global Composite Index. Morningstar rates it five stars over the past five years out of 1299 funds. Its number one holding is Facebook with a weighting of 11.8%, followed by AbbVie (NYSE:ABBV), General Motors (NYSE:GM), Kinder Morgan (NYSE:KMI) and Phillips 66 (NYSE:PSX) rounding out the top five.

Should Twitter bust out of the gate both Facebook and the ETF would benefit from its success and ultimately, Twitter would become one of the 100. If it's a complete bust, your investment will still be very much intact because information technology stocks account for just 16% of its overall portfolio. With an annual expense ratio of 0.60%, you’re getting one of the best ETFs anywhere. Not to mention it's a far safer proposition.

Option Three

Social media use in the U.S. is high. Something like 78% of the population has internet access with 72% using social networking sites like Facebook, LinkedIn (Nasdaq:LNKD) and Google+. According to Pew Internet, Only 18% currently use Twitter although that’s growing rapidly. Internationally, where internet access isn’t quite as high, the opportunities are significant.

A second ETF making your life a little easier is the Global X Social Media Index ETF (NYSE:SOCL), a group of 28 holdings involved in the social media industry. In existence since November 2011, its performance has really taken off in the past year.

Assuming Twitter's IPO takes place without a hitch I'm sure it will be quickly added to the Solactive Social Media Index, which the ETF tracks. US stocks account for 49% of the portfolio’s assets with China another 28%. Of the two ETFs, this one has greater risk attached to it but also greater potential returns.

Bottom Line

On several occasions I've written about the silliness of investing in IPOs, especially those in the tech sector. Usually overhyped, they provide little for the average investor buying on the first day of trading, while the institutional investors who acquired shares in the IPO, exit quickly before you and I figure out we've been had. 

Before Facebook went public a friend asked me if he should invest in the IPO. I told him to wait six months to a year in order to figure out where the company was headed, which turned out to be a reasonably sound piece of advice. Although my friend has yet to ask me about Twitter, if he does I'll tell him the same thing I told him about Facebook. 

There's no rush. 

Twitter may someday possess a $100 billion market cap, but that day isn't here just yet. Don't get caught up in the frenzy. Sit back and watch the action and over time you'll know if it's a worthwhile investment. Until then you have several thousand US stocks to consider instead. Or you can choose one of the three options provided above.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

Related Articles
  1. Personal Finance

    How To Ruin Your Career Using Twitter And Facebook

    Many people use social media in their professions. However, sometimes things can go wrong. Here are some things you should be aware of when using social media at work.
  2. Investing Basics

    10 Twitter Feeds Investors Should Follow

    You may not have time to follow these Twitter feeds all day, but some of the larger, commercial feeds are worth watching.
  3. Personal Finance

    How Twitter Changed Business/Consumer Relationships

    In just six years, Twitter has not only revolutionized social media but also the relationship between consumers and businesses.
  4. Retirement

    5 Top CEOs On Twitter

    These high-powered CEOs are on Twitter, sharing their thoughts on business, politics and current events. Find out what's on these millionaire CEOs' minds.
  5. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI Emerging Mkts

    Learn more about the PowerShares FTSE RAFI Emerging Markets ETF, a fundamentally weighted fund that tracks emerging market equities.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Cali AMT-Free Muni Bond

    Learn more about the iShares California AMT-Free Municipal Bond exchange-traded fund, a popular tax-advantaged ETF that dominates its category.
  7. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Dividend

    Learn more about the SDPR S&P Emerging Markets Dividend Fund, a yield-focused exchange-traded fund tracking global emerging economies.
  8. Mutual Funds & ETFs

    ETF Analysis: First Trust Dow Jones Global Sel Div

    Find out about the First Trust Dow Jones Global Select Dividend Index Fund, and learn detailed information about characteristics and suitability of the fund.
  9. Mutual Funds & ETFs

    ETF Analysis: U.S 12 Month Natural Gas

    Learn about the United States 12 Month Natural Gas Fund, an exchange-traded fund that invests in 12-month futures contracts for natural gas.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares Floating Rate Bond

    Explore detailed analysis and information of the iShares Floating Rate Bond ETF, and learn how to use this ETF as a defense against rising interest rates.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Venture Capitalist

    An investor who either provides capital to startup ventures or ...
  4. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  5. Social Networking Service (SNS)

    SNS stands for “social networking sites.” SNS users create a ...
  6. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!