Why does underpricing always occur for an IPO?

IPO underpricing is done to attract more investors and create demand for the issue. If the price of an issue is high, investors usually avoid participating in the issue because they fear losses. However, if the price of an IPO is low, investors may be attracted to invest in an IPO to make quick profits. A company already knows its value. So, with a small undervaluation, it can take a risk to gain a higher stake and achieve good results.

However, it should be known that not every IPO is underpriced. The underpricing is more common in less liquid and less known companies where investors may not invest their money quickly.

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