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Facebook proves a lesson in the risks of IPO investing

Facebook chairman CEO Mark Zuckerberg (center) applauds Friday Nasdaq’s opening bell.  |  FACEBOOK VIA AP

Facebook chairman and CEO Mark Zuckerberg (center) applauds Friday at Nasdaq’s opening bell. | FACEBOOK VIA AP

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Updated: July 3, 2012 9:31AM



Facebook investors who assumed getting in on an IPO was a get-rich-quick scheme just got a hard slap across the cheek.

Amid the frenzy for shares of the No. 1 social-networking company, many investors forgot a key of investing in initial public offerings: They’re risky and can go down. More than 40 percent of the IPOs in the past 12 months are below their IPO prices — a big reminder about why such deals are inappropriate for investors who don’t understand the risks.

Facebook is a textbook example. Despite rising the past two days, including a $1.03 gain to $33.03 Thursday, shares are still down nearly 13 percent from the IPO price last week. And that’s mild compared with the 65 percent decline of shares of fat-reducing medical device maker Zeltiq Aesthetics from its October 2011 IPO price.

“There were a lot of people, including myself, hoping to buy Facebook at the offer price and see it jump up,” said Jay Ritter, professor of finance at the University of Florida who bought 400 shares from his online brokerage. “We gambled; we lost.”

IPO lessons from the Facebook deal include:

† IPOs aren’t appropriate for many investors. Facebook’s lackluster performance shows IPOs aren’t a place for inexperienced investors, said Danielle Tierney, analyst at Aite Group. “Retail investors have no place in IPOs, especially a celebrity IPO like Facebook,” she said.

† Investors are on their own on pricing. Because there’s no trading history and few analyst reports to read, investors must rely on their own research, said Francis Gaskins of IPOdesktop.com, who warned investors to avoid the Facebook IPO. Facebook’s slowing growth and trouble profiting from mobile users was clearly spelled out in the massive IPO filing, he said.

† Exposure to a risky part of the market. Many IPOs are from small companies with high growth prospects and valuations. Such companies, even when they’ve been trading for years, are among the riskiest corners of the market, Ritter said.

That’s why IPOs should be considered only by investors with portfolios that are diversified and designed to reach specific financial goals, said Stuart Ritter of T. Rowe Price.

Investors need to beware when dealing with IPOs. “If you want to play the game, you have to understand the risks,” Gaskins said.



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