Problem
Miles heard about a fantastic restaurant chain that is issuing an initial public offering (IPO), so he took Dollie to try one of the nearby restaurants. To say the least, they loved it. The restaurant specializes in Thai food and Turkish coffee. According to the tombstone advertisement, the underwriting syndicate appears very reputable. Miles thinks that this opportunity may be the next "Amazon" and thinks that buying stock in the IPO is almost a sure thing. Dollie isn't quite so convinced, because she reasons that if the investment was such a sure thing, why would she and Miles get a shot at the deal? Miles and Dollie have a brokerage account worth $20,000. They are thinking of investing at least $5,000 in the IPO.
What advice would you give Miles and Dollie? Is Miles correct in thinking that an IPO will dramatically increase in value? Why or why not? What risks might Miles be overlooking when he envisions huge profits? Based on your perception of risk and return in relation to IPOs, what would you recommend to Miles and Dollie?