One of the most talked about initial public offerings of stock in history is scheduled to hit Wall Street on Friday. But Better Business Bureau of Southern Arizona cautions that when Facebook goes public, prospective investors should be wary of the hype and rely instead on research and consider professional advice.
“Many inexperienced investors may be drawn towards jumping into the stock market for the very first time,” said Kim States, BBB President. “In fact, we routinely teach our children investment strategies through the purchase of familiar brands’ stock, like Disney, McDonalds and Wal-Mart. But despite explosive growth to date, whether Facebook will be a wise investment has yet to be determined.”
While past performance is one thing to look at when evaluating an investment, other things to consider are the company’s ability to sustain growth, the valuation of the stock against earnings, competition and future trends including, in the case of Facebook, an increased number of mobile device users.
When the stock hits the market Facebook’s CEO, Mark Zuckerberg, will retain a controlling interest of 57 percent of voting shares, giving him virtually absolute power over the company. A bad decision, scandal, or other management crisis, could cause a drop in company stock, and investors would have little recourse to demand changes.
BBB and the Financial Industry Regulatory Authority’s Investor Education Foundation (FINRA) offer the following common investor traps based on investor complaints and how to avoid them:
Misrepresentation can occur when a broker purposefully makes untrue representations of material facts or omits material information. This can happen in any security in any account, but this problem is commonly found with low-priced, speculative securities because of their increased risk.
How to Avoid This Problem
Ask the broker to send you information that will back up his/her representations.
- If you rely on your broker, make sure the investment meets your objectives; and make sure you understand and are comfortable with the risk, costs and liquidity of the investment. Never invest in a product you don’t understand.
- Ideally, you should independently verify information by thoroughly reading a prospectus, research reports, offering materials, annual reports (10K), quarterly reports (10Q), brochures or other documentation. (more…)