An IPO can be started for various reasons, but the main purpose is to improve liquidity. The investor can also gain a lot from investing in an IPO, but you must be aware of the risk before buying IPO. There are pros and cons of IPO; here is what you should know if you’re considering investing in an upcoming IPO.
Risks involved in IPO investment
- No guarantee of allotment of shares
The largest risk associated with an IPO is that you won’t receive the shares. The procedure for purchasing IPO shares is subscription-based. Any number of applicants are eligible to apply. The business will distribute shares proportionally regardless of applicants.
- Getting less than the invested amount
You risk losing the money you invest when you purchase IPO shares. This is because the listing price of the share is often lower than the acquisition price, and the IPO shares’ exact price is not known until after the exchange lists them. If this occurs with your chosen company, you’ll unavoidably lose your invested amount deposited.
- Company’s background
You can purchase IPO shares from companies with a variety of backgrounds, but not all of them will be able to provide you with good returns because the price of the IPO depends on several different factors, including the industry’s fragility, its past performance, the success of an affiliated company, and many more. Any one of the determining factors can become problematic, which can lower the IPO price and lower your overall results. Therefore, investing in IPO is risky.
- External influences
Businesses operate in areas where regulations from the government play important roles. For example, suppose you purchase IPO shares in such firms in India. In that case, you are again entering uncertainty because you do not influence the legislation, which may change according to the current political discourse.
- Money loss
Your money will stay with the company until it reveals share prices and lists them. Buying IPO shares can surely decrease your liquidity.
From the above analysis, one can infer that IPOs carry a certain amount of risk. But, along with that, one needs to manage these risks to guarantee steady fund growth over time.
Before investing in an IPO, keep these risk factors in mind. First, you must register a Demat account to buy equity shares. If you don’t already have an account, you can open A FREE Demat account with the Shoonya app, India’s most trusted trading platform that offers services at zero brokerage.