Risks to Understand Before Applying to an IPO

17 Feb 2022|

1 min read |

by ICICI Securities Team

Introduction

Companies that go public are popular. Their products have gone from a want to a need in a short time. Though the investors are familiar with the company, and its growth prospects are appealing, investing in such companies does come with a fair share of risks. Click here to read about the IPO application process.

Risks involved in applying to an IPO

· Overpriced valuation:

Companies typically have their IPOs in a market where the prices are continuously rising. The market is optimistic. That also means that the price tag of companies also follows the same tone. Most of the companies overvalue their stocks. They know that the market is booming and take advantage of investors' eagerness to buy a part of their company. Hence they hike up the price of their stock. When you apply for IPOs of such companies, you may face the risk of the cost of the stock falling during the listing day. After a few months, investors may notice that the company's performance is not up to expectations, leading to a further drop in prices. That could lead to a heavy loss.

· Lack of History about the company:

Though a company applying for an IPO would highlight its financials and business operations in its draft red herring prospectus, this is still not enough data to judge its performance. The company might be managed by a team that is not efficient or without the required know-how. A company might also just show the profitability gained during a short run. It is difficult to know how it would perform in the long run. A new company running on its model might also find it challenging to transition to a business model. As an investor in such companies, you should clearly understand their long-term growth, profits, and reasons for going public.

· No surety of allotment of shares:

As a retail investor, you might face the risk of not being allotted the shares that you have applied for in an IPO. Along with you, there might be lakhs and maybe millions of other investors who have applied for the same or a more significant number of shares in a company. Due to this, if a company's IPO is oversubscribed, the allotment of shares is based on a lottery. Luck might not favour you, and you may not receive any claims. The acceptance of your application is no guarantee that you will be allotted shares in an IPO. You will face the loss of any financial gain that you might have benefited from receiving the shares.

Additional read: Initial public offer

Conclusion:

Before applying to an IPO, as an investor, you need to avoid the hype from flashy companies. It might be more profitable and less risky for you to invest in companies you have read about.

Disclaimer

ICICI Securities Limited has its registered office at ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400025, India, Tel No:- 022 - 2288 2460, 022 - 2288 2470. The non-broking products / services like iLearn and Financial Learning are not exchange traded products / services and ICICI Securities Ltd. is just acting as a distributor/ referral Agent of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism. iLearn is not an exchange traded product/service of ICICI Securities Ltd. All disputes with respect to the activity on the platform would not have access to Exchange investor redressal or Arbitration mechanism.

ICICI Securities Ltd. is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. ICICI Securities Ltd. is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990. Name of the Compliance officer (broking): Mr. Atul Agrawal, Contact number: 022-69997051, E-mail address: complianceofficer@icicisecurities.com Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. ICICI Securities Ltd. and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Such representations are not indicative of future results. The securities quoted are exemplary and are not recommendatory. AMFI Regn. No.: ARN-0845. PFRDA registration numbers: POP no -05092018. ICICI Securities Ltd. acts as a Composite Corporate agent having registration number -CA0113. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund, Corporate Fixed Deposits, Bonds, Alternate investment funds, Tax planning, Succession planning, NPS, IPO, Investment Advisory and Loans related services are not Exchange traded products and ICICI Securities Ltd. is acting as a distributor to solicit these products. Please note, Insurance related services are not Exchange traded products and ICICI Securities Ltd. is acting as a corporate agent to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The non-broking products / services like Research, etc. are not exchange traded products / services and all disputes with respect to such activities would not have access to Exchange investor redressal or Arbitration mechanism. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.

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