Investing in an IPO can be attractive, but it comes with several risks that investors must understand before applying.
- Operating History: Many companies coming with IPOs are young or fast-growing businesses, may not have a long track record of stable revenues or profits, making future performance uncertain.
- Valuation: IPO valuations are often based on future expectations, not past performance. If the issue is overpriced, the stock may fall on listing or shortly after.
- High Market Volatility: IPO prices can fluctuate sharply due to market sentiment, a good company can still list at a loss if the market mood turns negative.
- Limited Information for Investors: Retail investors depend mainly on prospectus, media coverage, broker / analyst reports which may not provide the full picture. Institutional investors may have deeper access and insight.
- Lock-In Expiry Pressure: Anchor investors have 30-day and 90-day lock-in periods. When lock-in ends, some large investors may sell, causing price pressure.
- Business & Industry Risk: IPO carries sector-specific risks such as regulatory changes, competition, Input cost fluctuations, technology shifts. These may not reflect fully in IPO pricing.
- Liquidity Risk: Some newly listed stocks have low trading volumes and wider bid-ask spreads. This makes it difficult to exit at the desired price.
- Psychological Bias: Retail investors often participate due to hype, social media discussions and oversubscription figures. This may lead to emotional decisions rather than fundamental analysis.
