Avoiding IPO victimization

facebookIt’s possible to lose a lot of money on Initial Public Offerings of stock, or IPOs. (Companies  that want to begin having their shares openly traded “go public” with an IPO arranged by an investment bank. The investment bank buys the new shares, pays the company, and then releases the shares to the open market. Sometimes a stock recently available through an IPO will skyrocket, making lots of money for those lucky enough to get in early. But it’s a risky bet for the individual investor.)

The Atlantic reports on the story of a retired schoolteacher who placed a big bet on Facebook the day of its IPO. She risked over $200,000 on the stock of the social networking site, only to find thousands of dollars of wealth evaporate when the IPO flopped. In fact, Facebook is famous now for its big flop. There’s a lot more detail to the story, but the fundamental mistake she made was playing against the big boys in their game.

IPO’s are inherently a bad place for individual investors to be gambling. So to avoid IPO victimization, avoid IPO’s.

If you want to gamble, buy a lottery ticket or go to Vegas. If you want to invest, then buy and hold index funds.