When a company launches an IPO, many investors become interested because new listings often receive a lot of attention in the market. Some people expect the share price to rise after the company gets listed on the stock exchange.
However, investing in an IPO is not always risk-free. Not every IPO performs well after listing. In some cases, the share price may fall due to weak company performance, high valuation, or changing market conditions. As a result, investors might face losses instead of profits.
Before investing in any IPO, it is important to understand the possible risks and not invest based only on market excitement or public opinion.
In this article, we will understand what an IPO is, how to invest in an IPO, and the major risks involved.
An IPO, or Initial Public Offering, is the process through which a private company offers its shares to the public for the first time. After listing on the NSE or the BSE, investors can buy and sell those shares in the stock market.
Companies usually launch IPOs to raise money for expansion, repay debt, fund new projects, or allow existing shareholders to sell part of their stake.
For investors, IPOs can look like a good chance to invest early in a company that might grow in the future. But there’s a catch: IPOs also come with risks.
In India, IPOs are controlled by SEBI (Securities and Exchange Board of India). This means the process follows clear rules so that investors are protected.
Here’s how it works in simple steps:
The company prepares a long but important document called the Draft Red Herring Prospectus (DRHP). Think of this as the company’s “story and report card” put together.
Reading this document helps you understand the company better before deciding whether to invest in its IPO. For a beginner, you don’t need to understand every number; just focus on the main points: what the company does, how it has earned money, and what risks it mentions
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4. You apply for shares
The IPO is open for a few days (usually 3-5 days). You can apply online using your demat account.
There are different categories:
If the IPO is very popular, many more people apply than there are shares available. Then, shares are allotted based on SEBI rules, and you may get only a few shares or even none.
6. Listing and trading
After the issue closes and allotment is done, the shares are listed on the stock exchange (NSE or BSE).
The listing price on the first day can be:
So, the IPO price is fixed before the stock actually trades. The real test happens after listing, when everyone can freely buy and sell.
Let’s take a hypothetical company called “QuickServe Logistics” that is in the delivery and logistics business.
After allotment, the shares list at ₹180 on the first day. Some investors feel happy because they got shares at ₹150 and the listing price is higher.
But over the next few weeks, the price slowly falls to ₹155 and then to ₹140 as the market rethinks whether the company’s growth is strong enough to support that valuation.
The learning point:
Even if an IPO lists at a premium, the price can fall later. The risk of losing money is real, especially if the company is overvalued or its business is not strong enough.
There are some positive points about IPOs, but they are not guaranteed:
So IPOs are not bad by themselves, but they should be chosen carefully and not just because of excitement.
Some IPOs don’t perform well because:
For example, a company may look exciting before launch, but once people see its real financial results, the stock price can fall.
Basis risk is a term borrowed from hedging and derivatives markets. It describes the gap that can appear between the price a benchmark implies and the price an asset actually trades at once it’s exposed to the open market. It isn’t an official SEBI or exchange term; it’s a useful way to understand why strong pre-listing signals don’t always hold up.
Applied to an IPO, basis risk is the mismatch between the “basis” used to price the issue – anchor investor demand, the company’s last private funding round, or pre-listing grey market signals – and what the stock is genuinely worth once the full market can freely buy and sell it.
Why this gap happens:
Go back to the QuickServe Logistics example earlier in this guide: the ₹180 listing price reflected pre-listing enthusiasm, the “basis”, not the company’s actual earning power. As the wider market absorbed the stock over the following weeks, the price corrected to ₹140. That gap between what the basis implied and where the market actually settled is basis risk playing out.
The practical takeaway: a strong anchor book or high GMP tells you what a limited group of buyers were willing to pay before listing. It doesn’t tell you what the stock is worth once the full market has a say. That’s why it helps to look past pre-listing indicators and focus on the checks below.
If you’re new to investing, here are some simple tips:
IPO investing can be exciting, but it also comes with risks. Many beginners lose money not because IPOs are always bad, but because they invest without fully understanding the company, its valuation, or the market conditions.
Here are some common IPO risks and mistakes investors should know:
IPOs often receive a lot of attention in the news, on social media, and in market discussions. Many investors apply just because everyone else is talking about the IPO.
However, hype does not guarantee good returns. If the company is overvalued or its business is weak, the share price may fall after listing.
Some beginners apply for IPOs without checking what the company does, how it earns money, whether it is profitable, or how much debt it has.
Investing without basic research can lead to poor decisions, especially if the company’s future growth is uncertain.
Some IPOs are priced very high based on future expectations rather than current performance.
If the company does not grow as expected, investors may feel the IPO was overpriced, which can lead to a fall in the share price.
Many investors apply for IPOs expecting quick profits on listing day. But listing gains are never guaranteed.
Some IPOs list at a premium, while others may list below their issue price or underperform after listing.
IPO stocks can move sharply up or down during the first few days of trading. Market conditions also play an important role.
Even a good company’s IPO can perform poorly if the overall market sentiment is weak.
Beginners sometimes invest a large amount in one IPO, hoping for high returns.
This can be risky because if the stock performs poorly, the losses can also be large. It is usually better to diversify and avoid depending on a single IPO.
Since the company is newly listed, investors may have limited market history to study. Even companies that look promising during the IPO stage can face challenges later.
In popular IPOs, demand can be very high. When an IPO is heavily oversubscribed, investors may receive only a few shares or sometimes no allotment at all.
Before applying for an IPO, investors can use this simple checklist:
This checklist can help beginners make more informed IPO decisions.
IPOs can be a good option, but they are not for everyone. Let’s simply understand this.
IPOs are suitable for people who are willing to spend some time understanding the company before investing.
You don’t need to be an expert, but you should at least know:
If you are ready to do this basic homework and not just follow others blindly, IPOs can be a decent option for you.
If you are new to investing, it’s better to go step by step.
Start with simple options like:
These are easier to understand and usually less risky compared to IPOs.
Once you gain some experience and confidence, you can slowly explore IPOs.
Even then, it’s smart to invest only a small amount in IPOs instead of putting a large portion of your money.
IPOs can be an exciting way to invest early in a company and benefit from its future growth. However, they also come with risks such as overvaluation, weak listing performance, market volatility, and limited past data. Beginners should avoid investing only because of hype or expected listing gains. Instead, they should understand the company’s business, check its financials, read the risk factors, and invest only an amount they are comfortable risking. A careful and balanced approach can help investors make better IPO decisions.
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