When investors, be they large institutions or small individuals, put money into a stock, they have to accept the possibility that their investment won’t pan out. That’s probably truer of an initial public offering for a stock than of one that’s already been trading, because not only is there more known about the latter company, its stock has some kind of track record.
Still, investment bankers that underwrite IPOs provide their institutional clients — who usually get first dibs — with information about the company’s performance, so these preferred clients can make educated guesses as to the IPO’s prospects. When the IPOs are winners, the stocks take off like rockets on the first day of trading, and the institutions can flip them for handsome profits, or hang on for bigger long-term gains.
By now, everyone knows that’s not what happened with the much-anticipated, heavily hyped Facebook IPO May 18. And while many institutional investors bought less of the stock beforehand or unloaded immediately that day, apparently because they’d been tipped off by underwriters that the company’s prospects had dimmed since the initial prospectus was issued, many retail investors who didn’t get that information bought more than they should have and got stuck holding the bag, which is now worth anywhere from one-fifth to one-third less than they paid for it. Understandably, they’re demanding to know what happened, and have found sympathetic ears in Washington.
The Daily Gazette, Schenectady, N.Y (May 30)