Jul 12, 2017
Diversification: The Biggest Lesson You Can Learn From Snap Inc.
It’s risky to invest in a single stock. It’s better to diversify.
Investors in Snap Inc., the parent company for the social media app that lets customers send and receive disappearing messages, were sure to be disappointed earlier this week. On Tuesday, the Snapchat creator’s stock fell about 9% to $15.50.
That’s quite a turnaround for a company whose initial public offering–when a company offers shares to the public for the first time–was one of the most highly anticipated in years. In fact, the company’s share price jumped 44% the first day of trading back in March.
Snap’s stock has been particularly popular with the millennial generation, who reportedly lined up to buy Snap’s shares this spring.
Oh, snap, what happened?
When a company goes public, it typically uses a large Wall Street bank to help it sell its shares to the public. That bank is called an underwriter. In this case, Snap used investment bank Morgan Stanley. Earlier this week, that bank downgraded its outlook for the company’s stock to a “hold” status.
Here’s a quick explainer about that: investment banks have experts who rate stock either ‘buy’, ‘hold’, or ‘sell’.
- Buy is the most positive rating, and suggests optimism about a company’s performance.
- Sell is the most negative rating, and as its name suggests, recommends unloading the stock.
- Hold is somewhere in between.
This spring, Morgan Stanley rated Snap a buy. The bank reportedly made its downgrade based on concerns about Snap’s growth prospects for the coming year.
Why does this matter?
It’s important to diversify when you invest in the stock market.
Exchange traded funds, or ETFs, are one way to do that. Instead of buying just one stock, when you invest in an ETF, you’re purchasing shares in a basket of company stocks that either track an index or a particular sector. When you diversify, you’re essentially spreading out your risk.
Social Media Mania, for example, tracks the Global X Social Media ETF. It has 31 social media stocks in its portfolio. The top holding is the Chinese online media company called Tencent. But it also includes such stalwarts as Google parent Alphabet, Twitter, and Facebook. Snapchat is in there too, but it only represents 3 percent of the portfolio’s entire base of holdings.
So while Snapchat investors were no doubt bummed out this week, investors in Social Media Mania probably didn’t even notice Snap’s problems.
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