Risks Involved in Applying for IPOs
Introduction
This document explains the various risks involved in applying for Initial Public Offerings (IPOs). It is intended purely for educational and informational purposes to help investors understand uncertainties associated with IPO participation.
IPO Investments Are Not Risk-Free
Although IPOs often attract significant attention, applying for an IPO involves multiple risks. Allotment is not guaranteed, and even after allotment, returns are uncertain.
Allotment Risk
In oversubscribed IPOs, especially in the retail category, the probability of receiving shares can be very low. Many applicants may receive no allotment despite applying correctly.
Oversubscription Risk
High oversubscription increases competition for limited shares. A high subscription multiple reduces the chances of allotment per applicant, particularly when the number of applications exceeds available lots.
Price and Valuation Risk
IPO pricing is determined based on issuer and market conditions. In some cases, the IPO price may not reflect the company’s true fundamentals, leading to potential losses after listing.
Listing Day Volatility
Share prices can be highly volatile on the listing day. There is no assurance of listing gains, and prices may fall below the issue price immediately after listing.
Market Risk
Broader market conditions can impact IPO performance. Changes in interest rates, global events, or market sentiment can negatively affect IPO demand and post-listing prices, regardless of company quality.
Information Asymmetry Risk
Retail investors often rely solely on offer documents and public disclosures. Limited historical data and incomplete information can make it difficult to accurately assess risks before investing.
Operational and Application Risks
- UPI mandate failures or delays
- Incorrect PAN, demat, or bank details
- Multiple applications leading to rejection
- Technical issues on broker or bank platforms
Liquidity Risk Post Listing
Some IPOs, especially smaller or SME issues, may have limited liquidity after listing, making it difficult to buy or sell shares without impacting price.
Lock-In and Selling Pressure
Shares held by promoters or early investors may be subject to lock-in periods. Once lock-ins expire, selling pressure may affect share prices.
Psychological and Behavioral Risks
Investor decisions driven by hype, fear of missing out (FOMO), or social media sentiment can lead to poor IPO investment outcomes if not supported by careful analysis.
Important Notice
This content is provided for educational and informational purposes only. It does not constitute investment advice, financial advice, or a recommendation to apply for any IPO. Investors should conduct their own research and consult qualified professionals before making investment decisions.