The main risks of investing in an IPO are that the stock can list and stay below its issue price, the company has little public track record to judge, large locked-in shareholders can sell once their lock-ins expire, and pricing often happens at the peak of hype. None of these makes IPOs untouchable, but each one deserves to be looked in the eye before you apply.
Risk 1: The stock can list below the issue price
There is no rule that a new listing must open higher. Divya applies to the IPO of Deccan Ceramics, a fictional tile maker, at ₹200. On listing day the stock opens at ₹174. A 13% loss before she has done anything. Listing losses are routine, even for heavily oversubscribed issues, because subscription demand and listing-day demand are different crowds: one applies hoping for a pop, the other has to actually hold the stock at that price.
And a weak listing is not always the bottom. Some IPO stocks drift below issue price for months or years. The issue price is what the sellers wanted; the market owes it no respect.
Risk 2: You are judging a company with a short public history
A listed company you can research through years of quarterly results, management commentary, and how the stock behaved through bad markets. An IPO company hands you a prospectus. A document written to sell shares, with risk factors drafted by lawyers and financials often dressed for the occasion (profit growth conveniently accelerating in the two years before listing is a well-known pattern). You are buying with less information than you will ever have about this company again.
Risk 3: Lock-in expiries release waves of supply
Promoters, anchor investors and pre-IPO shareholders are barred from selling for fixed periods after listing. When those lock-ins expire (at intervals from 30 days to several months and beyond) big blocks of shares become sellable at once. If early investors entered years ago at ₹20 and the stock trades at ₹200, their incentive to book profits is enormous. Prices often soften around known expiry dates purely from this supply overhang, regardless of how the business is doing.
Risk 4: Hype does the pricing
IPOs are marketed events. Advertising, anchor announcements, subscription-number headlines, and grey market premium chatter all arrive in the same week, engineered to make not applying feel like missing out. Companies also time IPOs for bull markets, when investors pay the most. The structural problem: the seller picks the moment and the price, and the seller knows the business better than you do.
How do I apply with eyes open?
Read the RHP's risk factors and the objects of the issue. Check how much is fresh issue versus an offer for sale. Compare the implied valuation with listed peers. Size the application so that a bad listing stings but does not matter. An IPO allotment should be a small slice of a spread-out portfolio, a principle covered in what is a portfolio, and why diversify? Do that, and an IPO becomes what it should be: an ordinary investment decision, evaluated like any other, just with less history and more noise.
Things to keep in mind
- Oversubscription is not a forecast. Hugely oversubscribed IPOs have listed at a discount; treat subscription numbers as demand data, not a verdict on the stock.
- Note the lock-in expiry dates before you buy on or after listing day. Scheduled supply is one of the few risks you can see coming.
- Judge the valuation against listed peers, not against the excitement; the prospectus is a sales document as much as a disclosure document.
- Apply only with money whose loss you can absorb, and let allotment be a pleasant outcome rather than a plan.