An IPO offers a huge (possible) reward at the cost of a huge risk in investment.  In such scenarios it is advisable to go through a systematic set of steps to understand better the odds of the IPO rewarding your investment.  We describe a step by step approach to understanding IPO investment:

1. When are IPOs issued and what are they?
- IPOs are initial public offers which are made by companies which are planning to go public. The company is usually opting to go public (meaning selling their stock to the public), when the company is planning to cash in on a huge growth opportunity, and needs to raise capital to attain that growth.

2. How do people make money on the IPOs.
- Most IPOs allow the public (specially the retail investors) to subscribe their share at a discount in comparison with the general valuation. This offers an incentive for people to subscribe to the issue. When the issue is actually listed on the index, depending on the market sentiment, the stock may be priced higher than the issue price of the IPO, or lower. The investor makes money if it is higher.

3. Gauging  and deciding IPO investment: All kinds of company metric like previous sales figures, PE, PEG, EPS, and other statistics. EPS is calculated on the price at which the IPO is issued and the number of stocks that are being offered as a part of the IPO. A comparison can be made to see if this is in line with that of the industry. Other qualitative indicators are the promoter standings. A good promoter will usually also indicate great business prospects for the company in the future.

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FPO stands for a follow-on-public offering. Details of how an FPO work are discussed in this wikipedia article.

Some reasons why FPOs are potentially not very rewarding on their listing day:

1. If the FPO is done at a steep discount, many large investors would still hold the shares as they won't be getting 100% allotment in the FPO.
2. However, there will be a considerable sell off if the offered price on the FPO is much lesser than the current market price.
3. There will be an additional sell off and corresponding drop in price from ppl cashing in on the listing gains.

Quoted from a response on a blog:
"The best price for an FPO would be at a slight discount to the current market price."

Comparison of historical data from some sites has shown that though IPOs show tremendous listing gains, the FPO pricing leads to modest to no gains. This matches with all of our observations above.

Another factor in this pricing, is the historical price of the issue. If there has been a run up in the price of the issue before the FPO, the discount in the FPO really does not hold. However, if there has not been any run up, it might be worth considering the FPO as being at a slight discount.

References:
1. http://www.financialexpress.com/news/fpo-pricinga-cause-for-concern/76001/0
2. http://www.e-investing.in/showthread.php?t=3180