Investing in Facebook: An IPO for Fools?
Investing in the Facebook IPO may not get you the returns you are looking for in the long run.
After years of speculation, the social networking site Facebook has announced its intention to go public. Without a doubt, this is the most highly anticipated initial public offering in the technology sector since Google went public in 2004. But now comes the question: should you invest? According to extensive academic research, investing in IPOs is not necessarily a good idea.
Tarun Ramadorai, a professor at the Saïd Business School at the University of Oxford, has studied IPO data extensively. According to these studies, having a buy-and-hold mentality with IPOs is inefficient. It is much better to buy the shares initially and then dump them after a few months, or buy shares in their competitors, he says.
The data shows that shares in newly-IPO'ed companies tend to rally in the first day of trading, and then over 6 to twelve months, the company's shares perform well relative to similar companies, says Ramadorai. But, on average, the evidence shows that comparable companies will outperform IPO'ed companies by a substantial margin over the long run, he says.
Alanna Petroff does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.