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Why the average Joe has no chance at Facebook's IPO

Facebook co-founder and CEO Mark Zuckerberg poses at Facebook headquarters in Palo Alto, Calif., Feb. 5, 2007.
Facebook co-founder and CEO Mark Zuckerberg poses at Facebook headquarters in Palo Alto, Calif., Feb. 5, 2007.
Paul Sakuma/AP

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Facebook's long-awaited IPO is expected to take place next week, tentatively scheduled for May 18th. Most expect that it will make founder Mark Zuckerberg among the richest people on the planet. But what does that mean for the millions that want to ride the Facebook gravy train?

And perhaps more importantly, how can you get in on it? The short answer: you probably can't. And even if you could, most investment advisors say it's a lousy bet.

The initial price per share is expected to fall within the range of $28-$35, but savvy investors seeking to acquire these shares may have a hard time getting their hands on them. Yes, small amounts of shares have been allocated to brokerages such as E-Trade, but given the fact that requests for shares by such companies are distributed via lotto, the odds of getting any are very slim.

Now, if you had $5 or $10 million in an investment account at Morgan Stanley, maybe you'd be offered a block of shares. Or, if you were a big institutional investor you'd have a crack at them, but effectively, they remain beyond the reach of most people. The good news? According to many investment advisors, you wouldn't want them anyway.

An IPO, or initial public offering, is a means for the creators and investors of a business to re-coup capital. So, given a high IPO, this may be a big day for Facebook's creator Mark Zuckerberg. His take will be north of $15 billion, making him instantly one of the richest people on the planet. And similar gains will be made by venture capital investors, employees, and people who have bought stock in the private market.

Traditionally one buys initial shares of a company to get in on the ground floor, and especially with a company that has a lot of growth potential. But according to investment analyst Barry Ritholtz, Facebook's IPO is "not early and it's not cheap." And the potential for growth is also suspect.

An illustrative example would be Apple, which is trading at about ten times last year's earnings. Now, consider Facebook. At its IPO price, it will trade at somewhere near one hundred times last year's earnings. As Ritholtz says, "the smart money is selling."

While not all analysts and investors share Ritholtz's opinion, it remains to be seen whether Facebook can convert their hundreds of millions of users into hundreds of millions of dollars. Keep in mind, last year Facebook's revenue came in at about a billion dollars, or slightly more than a penny for every user they claim.