Ask Matt: Should I sell my Facebook shares?

ByABC News
June 20, 2012, 7:43 PM

— -- Q: I bought 1,500 shares of Facebook on the first day of trading at an average price of $39 per share. What should I do now?

Talk about a quick lesson on the risks of investing in initial public offerings. Facebook shares have collapsed since the IPO to as low as $25.52. It has recently recovered some and is now trading around $32 a share. That means you are still looking at an 18% loss in the value of your investment in a little over a month. That hurts, especially since you were thinking you would have made a mint one day.

Buying the Facebook IPO was easy. Now is the hard part: knowing when to sell.

It's easy to think of the Facebook IPO as something special and unique. But in fact, it's just like any other misbehaving stock at this point. And the rules for investors are the same.

Before you buy any individual stock, you shouldn't just think about the price you're going to pay. You should know, ahead of time, what price you would sell at. You should always work within parameters, and know when you will either lock in your gains or cut your losses.

Typically, savvy short-term traders never allow their losses in an individual stock to exceed 10% of the price they paid. Losses that get into the mid- to double-digit percentages tend to be somewhat difficult to recover from. If you were a short-term speculator in the stock, and thought you'd be in this stock a few days, you should have been out as soon as things soured. Clearly, it's a little late for that now as the stock hit a 10% decline when it fell to $34 a share.

Next, try to guess when the stock will find buyer support. When a stock is in free fall, it's very difficult to know when it will find buyers. Some traders look at stock price charts to get an idea of price levels where buyers might come in. But since Facebook is an IPO, you don't have much trading history at all to look at.

Meanwhile, even more troubling is that some experts who have studied the valuation of Facebook think it could have more downside. Francis Gaskins, IPO analyst at IPOdesktop.com, thinks Facebook's true fair value is closer to $20 a share. If that's the case, this stock could have much more downside, and you should consider taking your lumps and selling.

But there may be reason to hang on. If your goal was to be a long-term investor in the company, you just stick it out. If you were planning to stay on board as the company pursued its mobile advertising strategy, and you believe social networking can be monetized, now may not be the time to sell. Just because the stock is down now shouldn't bother an investor who was in it for the long haul.

Investors who aren't used to dealing with intense market volatility should avoid IPOs. They're some of the riskiest and most volatile investments you can buy. Investors looking for a quick trade should have been out of this stock as soon as things headed south. But now that you're still in, you need to consider your objectives and decide if you're willing to endure what's likely to be a challenging time for Facebook as it builds its business.

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