Thus, if buying at the offering price requires you to hold the trendy boutique for a year or two (which may be required of you as a preferred customer), you may not be getting a great deal. In fact, my valuation of Facebook is predicated on the assumption that you may want to hold Facebook for more than a day in your portfolio. All of the academic studies that show the average underpricing are implicitly based upon the assumption that you can create an equally weighted portfolio of all IPOs, when in fact, a non-discriminating investor will end up will be with too much invested in all of the worst IPOs. That eternal question has particular resonance with IPOs, because the gains on the offering date can be fleeting. I hope you get only a fraction of the shares you ask for (see part 1 for why), that the stock price pops on the offering date, that you get out before the you-know-what hits the fan.
Note that the average is across all IPOs (and is skewed by the smallest IPOs) and that a subset of IPOs see a drop in price on the offering date. To see the link, note that IPOs go through hot and cold phases, with years in which you have hundreds of IPOs and years in which you have a few dozen. In addition, also note that IPOs in any given year tend to be concentrated in a few sectors and those sectors generally have momentum on their side (dot com stocks in the 1990s, social media companies today). Two big winners today were Apple ( AAPL ), which reported a blowout earnings quarter, and Knight Capital ( NITE ) who also reported wonderful earnings. A stockbroker is a person who will perform your trades at the stock market. The returns on IPOs lag the returns on other stocks in the market and do so much more in the first few years after the offering. The under pricing also is consistent with the incentives for investment banks, who generally guarantee the offering price to the issuers, and thus have fare more to lose by over pricing than from under pricing. You hope that those who buy these shares (and feel good about the profits they make) will be back in six months or a year to buy more shares in the company.