When Twitter (TWTR) filed for an IPO in 2013, both the financial and social media worlds were abuzz with anticipation. No longer was social media merely about posting random thoughts or sharing your latest Internet finds. Already seven years old at the time that it made its initial public offering, Twitter had a valuation of more than $9 billion, as reported by The Wall Street Journal. Prospective investors waited to see how a company built on the premise of communicating through just 140 characters would perform in the investment arena. Following the first day of trading, Twitter's shares jumped 70 percent. Within a month, shares had soared by almost 200 percent from the IPO price. (See: IPO Basics: What Is An IPO?)

Fast-forward to less than two years later. As investors became concerned about slow user growth, Twitter's stock prices took a tumble. In 2014 Twitter’s stock price was cut in half. CNN recently reported that the company's CEO was at risk of being fired due to such poor earnings.  (For related reading, see article: Why Facebook Should Buy Twitter.)

To be fair, Twitter was not the only social media company to experience a decline in stock prices. LinkedIn Corporation (LNKD) also saw its stock prices drop. While it would be easy to point at both instances and make a blanket statement that investing in social media stocks simply is not worth the risk, doing so is a stretch. Investing in social media stocks is certainly risky. Social media stocks have a history of volatility. Of the nearly two dozen social media-related companies that have gone public in the last few years, only a handful were trading above their IPO prices two years later.

Yet, at the same time, there is the potential for a healthy return. Despite the dismal returns experienced at the end of 2014 by LinkedIn and Twitter, Facebook (FB) has experienced a nice growth phase. Nasdaq has even predicted that Facebook's stock price will double by 2018. When Facebook first debuted its IPO, the resulting stock was what could only be described as dismal. There were concerns that the social media giant's shares might have been overvalued. Investors fretted that despite the company's impressive growth in the past, it would not be able to sustain a fast enough rate of revenue growth, according to USA TODAY. As a result, shares tumbled to as low as half of Facebook's IPO price in May 2012, as reported in The Huffington Post.

Since then, however, Facebook has managed to pull off an impressive about-face. A little over a year after its launch, Facebook's shares were up more than three percent. The following year, shares surged 40 percent.  Much of that growth could be attributed to the fact that many of the initial speculators have since exited the market. Now, Facebook's upward movement is being primarily driven by long-only investors. 

Social media investments have the potential for being great investments. Some succeed. Others do not. That can be said of practically any investment. One element that social media investing brings to the table that others do not is the excitement of being involved. Volatile or not, social media delivers an air of excitement and the idea that anything is possible. Mark Zuckerberg, who became one of the world's youngest billionaires thanks to Facebook, is living proof of that. (For related reading, see: 4 People You Never Knew Made Millions From Facebook.)

If you're going to get involved in investing in social media, there are a few things to keep in mind. 

The Safe Approach to Investing in Social Media

1. Recognize that social media stocks are unique and perform differently from other stocks. Social media earns revenue in a completely different manner from most of the other companies you might be considering investing in. Before you purchase a social media ETF, take the time to develop an understanding of social media, how social media companies are valued, and how revenue is earned. At the same time, keep in mind that valuation can be misleading. Many social media companies are often reported as being overvalued, yet when viewed from the lens of future market capitalization, many of these companies could actually be underestimated, should the pace of adoption significantly increase.

2. Be prepared for volatility. Stock prices can and often do surge or decline based on projected user growth along with other factors. If you are investing for the long-term, such volatility might not be of concern. If you are looking for a quick in and out, social media investing might not be the best option for your investment goals.

3. Diversify. The old adage of not putting all of your eggs in one basket is solid advice for any investment, including social media. Twitter, LinkedIn, and Facebook are all clear proof that while one social media company's shares may perform well at one time, another's could easily take a nosedive. Protect your investments by diversifying.

4. It's not just about a company. When planning to invest in social media, it is important to recognize that you are not just investing in a company. Canadian Business points out that investors are actually investing in the evolution of the Internet. In the last twenty years, nothing has disrupted technology more than social media, helping to drive sales of tablets and accelerating the growth of the mobile market. (For guidelines on investing in the highly volatile technology sector, see article: How Much Exposure To Technology Stocks Should You Have?)

5. What is your investment approach? Clearly, the lesson to be learned here is that while social media stocks can be risky, there is also plenty of room for handsome returns, if you are willing to ride out the waves. If you are getting in on the IPO of a social media company purely on speculation, be prepared to face risk. On the other hand, if you are willing to stay with it for the long run, you might find that investing in social media presents the opportunity for growing your portfolio. It is all really about your own tolerance for risk.

Everyone is different, and reviewing your own tolerance for risk is essential before getting involved with investing in social media ETFs. Of course, that should be the proper course of action prior to investing in any stock. Given the proven volatility of social media stocks, it becomes even more important to conduct an assessment when considering the purchase of such stocks.

The Bottom Line

The reality is that despite the roller-coaster ride associated with social media stocks, social media itself is not going away. If anything, social media has become more prevalent and ingrained in mainstream society. Carefully selecting social media ETFs can provide you with the opportunity to diversify your portfolio and take advantage of potential profits as social media sites undergo market growth. 

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.