The initial public offering of Facebook stock was perhaps the most widely publicized IPO in history* With the company valued at multiple billions of dollars, the stock was priced at $38 per share by the issuers and soon started trading at nearly $42* After moving as high as $45, the stock now trades around $26*
Thus, if you had paid, say, $39 a share for Facebook, you would have lost one-third of your money in a few weeks* What can you learn from these events?
* IPOs are high-risk investments* When you buy a stock at or near its first offering, you have no idea how the company will perform over time, or how investors will react* Therefore, you should treat IPOs as speculations, and invest only a small portion of your portfolio in any one deal*
* Beware of hype* Big-name IPOs may deliver huge returns (think of Google) but they also can flop* Look for a solid business plan and something that will keep competitors from duplicating the company’s operations*
* Don’t rush* You may be better off buying after the stock has traded for a while, rather than jumping in immediately* No matter what happens in the future, Facebook is a better buy at $26 rather than $39 a share* One strategy is to invest gradually, over a few months, so you don’t miss an early pop but you still protect yourself against a steep slide in early trading*
