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Risks to Understand Before Applying to an IPO

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 Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.  Please note, IPO related services are not Exchange traded products and I-Sec is acting as a distributor 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 contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.

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