Market Education Of The Facebook IPO

May 23, 2012 12:05 PM ETMETA
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Contributor Since 2012

One of the greatest things about the Facebook IPO and the massive market attention on it is that it provides a great learning experience to those new to the stock market, as well as a good review for the experienced trader.

A stock IPO is a high-risk event. Since there isn't a track record of price behavior in the open markets NO one can accurately predict what will take place.

In the example of Facebook, we also see the massive hype to the public as a factor. In addition, the well-functioning secondary market to trade the private shares pre-IPO also extracted the "early" value and the stock was priced at the absolute limits of what the market would bear on the day of IPO.

As we've seen the stock price retract from its initial day of trading we have no idea where a solid level of price support exists. No one does until we see it reflect and confirm itself in the price behavior. The best guidance for "where" that price level is will be recognizable chart patterns.

4 days of trading is not enough for a reliable chart pattern to emerge.

Trading this stock right now is a high-risk endeavor.

Long-term success in the stock market is heavily reliant on you limiting risk as much as you can.

That's why the Facebook IPO is a textbook learning example of why most people should stay away from trading stocks on or near their IPO, unless you feel like gambling.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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