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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.

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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.