Is Investment In An IPO Risky?

Initial public offerings or IPOs do not have a stock-trading history because they start trading only after the IPO offer is closed and it is listed in the share market. Even so, many investors find the idea of investing in IPOs an alluring one. Companies that take the route of public investment are often those that are in industries that investors are greatly interested in. Most of the companies that start IPOs are those that have already become household names in a quick time, and they then turn to IPOs so that they can raise the cash needed for sustaining the rapid growth of their business. 

Related: All you need to know about Pre IPO Shares

Investing in IPOs is always speculative, and as we have said before this is mainly because the stock of that company has not been traded previously, and except for reading about that company in business news, an investor has only the prospectus of the IPO available to get any added information about the company. Most companies that offer IPOs are young companies and often ones that are small, but still growing at a fast rate and need additional finance to finance their growth. So, they are companies that have limited operating histories, often have immature management teams, and sell just a few products to a limited number of customers. 

Most companies that offer IPOs first sell their shares to the larger institutional investors at the price they have offered in their prospectus. If they can convince these larger investors of the soundness of their business proposals, then the chances of it being a successful public offering become that much greater. When IPOs are much anticipated and have generated a lot of interest from the public, the share prices get driven to high levels that are often unreasonable. Much of it is often speculative buying by traders and investors, who will buy low and sell as soon as prices have risen and assured them of decent returns. Many investors keep aside certain funds just for investing in IPOs and the profit they can make from their buying and immediate sale. 

Also read: How Regulation A+ Creates Mini-IPOs For All Investors?

The biggest risk that an investor takes when he invests in IPOs is that he has to compete with many individuals applying for the subscription to these shares, and thus has no guarantee of being allotted the shares applied for. Companies allot shares on a proportional basis, and you may just get a small percentage of the shares applied for, while your money remains committed for the period between the start, closing, and allotment of shares.  

Prices of IPO shares are determined only after they get listed, and there is never a guarantee that it will be more than what you have paid. The risk is that you can lose on the invested amount. IPO prices after listing depend on the industry and its prospects, and even the performance of any of the affiliated companies of the IPO lister. 

External influences like government legislation can affect the share prices of IPOs. An added risk in investing in IPOs is that your money gets blocked until the shares are listed, and this can affect your liquidity.

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