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Investing In Social Media Stocks: The Do’s And Don’ts

While the social media revolution has made the world a smaller place for users on one hand, it has created a plethora of opportunities for investors on the other. Today, people of nearly all age groups engage in social media networking to some extent or the other. Social media biggies such as Facebook, Twitter, and LinkedIn have become household names, used by people from all across the world. In such a scenario, investing in social media stocks definitely seems to be a tempting prospect. But, how profitable are such stocks, really? Below, we’ll be taking a more comprehensive look into the nitty-gritties of investing in such a niche segment.

Ignore The Initial Glitz

Close to a decade back, just as the concept of social media networking was beginning to make its presence felt worldwide, the possibility of monetizing such a segment seemed to be bleak. Fast forward a few years, and one can see that investors were itching to be part of the social media wave.

Ignore The Initial Glitz

When Twitter decided to go public, the market had gone into a frenzy, and stock prices flew high. Initially priced at $26, Twitter’s stock opened at $45.10 a share, peaked at $50.09 per share, and closed the day at $44.90. For those fortunate few who could lay their hands on Twitter stock at the initial offer price, the first-day gained turned out be a sweet 72%. Within a few months, Twitter stock prices hit all-time high of $69 per share; but this glory was to short-lived, for within no time, the stock prices took a dive, falling to as low as $30.50 a share. Presently, Twitter stock prices are somewhere around $37; lower than they were during its IPO. Due to its inability to generate large profits, investor confidence in Twitter has been dwindling since some time now. Twitter’s case is one that shows why it is important to understand the market and the company in a more thorough manner.

A Few Winners, Far Too Many Losers

Facebook and LinkedIn are one of those few social media companies whose stock prices have risen since they went public; their current stock prices are definitely higher than the ones prevalent during their IPOs. Facebook stock, valued at around $38.23 on the day of its IPO, is currently priced at $74.99 per share. Similarly, LinkedIn stock was priced at around $93.09 a share at the time of its IPO, and presently, it is valued at $224.57. While these are two cases where investors have been left smiling, there are many more that have left deep dents in their pockets.

A Few Winners, Far Too Many Losers

Renren Inc. Stock Analysis Chart

Renren Inc., a Chinese social networking company, made its debut on the NYSE at $16.80 a share. However, within a month and a half the stock prices had plummeted to about $6.23, and presently, they are priced at $2.53 a share. This disappointing performance is a clear example of how skewed expectations can lead to disastrous outcomes. Social media networks like MySpace and Friendster have had their brief moments of glory, disappearing from the public view as quickly as they first appeared.

In such a scenario, it is essential that one look into the revenue model of each company being considered. Companies like Facebook are no longer confined to the social media segment, and have diversified into other sectors. Such firms have better growth prospects, since being dependent solely on the social media sector has its drawbacks. There are plenty of investment options out there, consisting of many lesser-known ones, and making a highly informed decision is imperative for prospective investors.