IPOs

I had a quick question about IPOs:

I know that the price of an IPO generally goes up, sometimes dramatically, before it hits the open market. Is this an instant jump, or does the price gradually rise during the "closed" (for lack of a better word) part of the IPO? For instance, if my broker says they can get me shares of an IPO, can I be assured I'll get them at the IPO price, or could I end up with shares priced anywhere from the IPO to the price when shares hit the open market?

Gotcha. So it does rise before it hits the open market?

No, it was not a trick question, just genuinely something I didn't understand and I was having trouble with my google-fu in trying to find the answer. And thank you for the answer, because what you said is exactly what I was looking for: to use the example of LNKD, the IPO price was $45, and it opened at $83 (or whatever). I was wondering if some of the investors/institutions participating in the closed part of the IPO were paying $50, $60, etc, all the way up to the opening price of $83. If I've understood you correctly, that's not the case. Everyone who purchases before it hits the open market purchases at the IPO price. That's exactly what I was looking for--thank you for the clear answer. I appreciate it.

And yeah, I understand it's generally fairly difficult to get shares at the IPO price. Out of curiosity, do you know if that's equally true for all IPOs, or is it easier to get shares of small-cap, less-well-known IPOs? Is it not meaningfully different for an individual investor? edit: I ask because I'd be interested in investing in some IPOs if I could -- and not big buzzworthy ones like Zynga -- but I don't know if it's any more realistic to think that as an individual investor (without a great deal of capital) would have an easier time with random small-cap IPOs.

Yeah, it does make sense. I mean, there must be some explanation, because it seems like IPOs are consistently "underpriced." IIRC, over the last nine months, the average gain from IPO to the open was just over 12%. From my limited reading on the subject, I guess there's a fair bit of academic literature on the subject of the consistent underpricing of IPOs. But don't take my word for it -- obviously I don't know much about this stuff.

I agree that they often underperform in the long run; I think I saw a study that actually showed that over the last 20 years IPOs substantially underperformed the market, actually. In the short run, however, there's massive profit to be made. Unfortunately usually only large institutional investors are allowed to buy and flip IPOs in the first day, it seems (again, this is my not-super-informed impression of things). I was just playing with a historical dataset from the last 10 months or so, and it was just pretty clear from at least that sample that investing at-random in IPOs and flipping at the market-open price would generate pretty insane returns in short periods of time, assuming reinvestment -- and this held up (albeit to a lesser extent) even if you focused on smaller-cap firms. The strongest correlation (probably not surprisingly) was the difference between the proposed price range and the actual price of the IPO; and the change from IPO to open. I figure that any gain from the proposed price represents "buzz," but I found that if you limit the at-random investment solely to IPOs that don't experience a strong gain from proposed price to actual IPO listing, you still generate very large positive returns in just a few months. It also held up even if you sold at the close instead of the open on the first day, but gains were smaller.

Of course it's a small sample and I'm sure there are any number of places I could have made errors but it did seem like the persistent underpricing of IPOs is something close to free money for those big institutional investors who can flip the first day.