Investors question fairness of IPO market after Facebook

ByABC News
June 25, 2012, 7:43 PM

— -- Q: Does the botched Facebook IPO prove that the stock market is rigged?

A: Investors who lost money on the Facebook IPO are ready to throw the book at Wall Street.

Investors who got caught up in the hype over the initial public offering of the No. 1 social-networking site got a tough lesson on volatility.

Rather than being a lottery ticket for a big first-day pop, the stock has suffered ever since it debut. Investors who bought at the offering price have lost almost 16% of their money.

There's some question over how investors who lost money on Facebook will perceive the stock market. Some speculate that newbie investors who took a flier on Facebook got enough of an education to keep them away for a while. There's no question that Facebook was a reminder that IPOs are risky propositions and only for investors who understand the dangers.

But, it's hard to find evidence that a bad experience with Facebook will chase investors from stocks. The idea that Facebook was bought mostly by young investors new to stocks is likely a myth. Investors in Facebook at the IPO were roughly 40 years old on average at TD Ameritrade, which is one of the largest online brokerage firms. That's only slightly below the average age of TD Ameritrade customers, who are typically between 40 and 50 years old, the brokerage says.

While the stock market has been struggling since early May, it's hardly been a bloodbath. Despite massive debt problems in Europe and an apparent slowdown of the Chinese economy, the Standard & Poor's 500 index remains up 4.5% this year. The Nasdaq composite index, which is loaded with tech stocks, is up 9% this year. That's hardly evidence of investors fleeing from stocks, says Edward Wedbush of investment firm Wedbush Securities.

While there may have been some technology errors with the initial trading of Facebook, they were not indicative of a widespread problem with the way IPOs are handled, Wedbush says. In the few cases where there were errors, it's the broker's obligation to make them right, Wedbush says.

There's no question the errors with trading were regrettable, Wedbush says, but they weren't of the magnitude to scare off investors. "What's going on worldwide, particularly in Europe, is more important," he says. And "the U.S. markets are holding up pretty well."

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz