Initial public offerings (IPOs) are supposed to represent the Holy Grail. It's your chance to own the next Microsoft or the next Google. But is it really your lottery ticket to riches?
Here's what usually happens: People buy stocks at the wrong price hoping for a quick gain and more frequently end up with quick losses.
Social media stocks are 2012's poster child for what can go wrong. Overhyped IPOs like Facebook (FB), Zynga (ZNGA) and Groupon (GRPN) were promoted as a sure thing. Since its May debut, Facebook has already lost more than half its value and Zynga AT around $2.50 per share is now practically a penny stock. As a group, social media stocks (SOCL) lagged the broader stock market by around 12%. 
Does that mean IPOs are a bad investment? Not necessarily.
Since 1980, the average first-day return for IPOs has been 18%. But here's the problem: Those returns are based upon buying the IPO at the stock's offer price and selling it on the first closing day. Most investors can't buy IPOs at the offer price, because only the underwriters' favorite clients are given that chance. Instead, investors have to buy the IPO in the public market, usually after its price has already "popped."
Does buying and holding an IPO improve your odds of making a profit? Not necessarily.
