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Why does underpricing always occur for an IPO?

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An IPO underpricing occurs to attract more investors and create demand for the issue.

Generally, if an issue is overpriced, the investors avoid participating in the IPO, fearing losses. However, if an IPO is underpriced, investors may get attracted to invest in an IPO to earn quick profits. A company already knows its worth. Thus, with little underpricing, it can take a risk to motivate better participation and perform well.

Having said that, one should know that not every issue is underpriced. The underpricing is seen more in less liquid and lesser-known companies, wherein investors may not invest money quickly.


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