The basic reason for investing in an IPO is that they are often under-priced (sold at a price lower than what its actual worth is). This means that they usually see significant increase in price on the first day of trading. These are known as listing gains.
There are many theories surrounding why such under-pricing occurs usually based on the conflict of interest between the issuing firm, the lead manager which handles the issue, and investors, like you and me, and uncertainly about the true value of the firm.Of course not all IPOs are under-priced and there are some issues which do poorly after they are listed.
Applying for an IPO
IPOs are generally advertised prominently well before the issue date. The advertisement provides information about the brokers and banks having the prospectus and application form.
The prospectus contains important information about the business plans of the firm and its past financial performance. This is important because there is usually little public information about unlisted companies.