The Facebook Debacle: Investing in IPOs a Sheer Stupidity

Updated on

The Facebook Debacle: Investing in IPOs a Sheer Stupidity

The Facebook Inc (NASDAQ:FB) shares have fallen almost 27% since its much hyped IPO on May 18. As the stocks continue to crumble, the small investors have lost more than $2.5 billion in less than a month. “This is a big issue hanging over the price of the stock,” says Stephen Diamond, professor of law at Santa Clara University. “Facebook’s stock price still has a way to go on the downside as the market takes account of increased supply.”

Worse, there is more trouble brewing. The early investors may put all their shares for sale, which will pull the prices even lower. Maybe it’s high time Mark Zuckerberg should abandon his honeymoon and do something for the innocent small investors.

A shareholders’ lawsuit against the Facebook management accuses that the company provided material information on the second-quarter financial performance to institutional investors, but didn’t reveal the same information to small investors.

Put all that aside. When will the small investors realize that IPOs are the hype machines of Wall Street that are intended to benefit only a few Wall Street heavyweights, not the small investors.

The top moneymakers in IPOs are the Wall Street banks. They get millions of dollars in fees for every IPO, irrespective of the ups and downs in the stock prices.

The next group of beneficiaries are the institutional investors, the firms that pay huge fees to the Wall Street banks. Obviously Wall Street wants to keep these big players happy. So, many times they receive (inside) information that the small investors are always deprived of.

Finally, the third most important beneficiary of IPOs is the company itself. Wall Street wants the company getting public to be hooked with them for a long-time so that it can generate future revenues from the offerings, debts, mergers or wealth management services. Therefore Wall Street ensures that the company gets enough value during the IPO to keep the company management happy.

The small investors don’t even exist in the list of “priority groups.” So forget that you can make money from an IPO. Just stay away from it, even if it’s Facebook.

Do you know which under-the-radar stocks the top hedge funds and institutional investors are investing in right now? Click here to find out.

Signup to ValueWalk!

Get the latest posts on what's happening in the hedge fund and investing world sent straight to your inbox! 
This is information you won't get anywhere else!