IPO Investment Risks and Benefits – A Complete Guide with Examples
Investing in an IPO (Initial Public Offering) has become a popular option for many retail investors looking to get early exposure to a promising company. But just like any other investment, IPOs come with both risks and rewards. This article explains both sides of the coin with real-life examples and simple math.
What is an IPO?
An IPO is when a private company offers its shares to the public for the first time to raise capital. Investors apply during the IPO period and if allotted, they become part-owners of the company.
Benefits of Investing in an IPO
1. Potential for Listing Gains
If an IPO is in high demand, it can list at a price higher than its issue price, leading to instant profits.
Example:
Issue Price: ₹100
Listing Price: ₹150
Profit: ₹50 per share
100 shares = ₹5,000 gain
2. Long-Term Wealth Creation
Strong IPOs can deliver massive returns over time. Infosys IPO (1993) was ₹95/share. Now it’s ₹1,500+. A ₹10,000 investment could be worth lakhs today.
3. Early Entry in Promising Company
IPO investors get in at the ground floor. You can be part of a company before it becomes popular.
4. Portfolio Diversification
IPOs let you enter new sectors like EV, fintech, defense, etc., balancing risk.
Risks of Investing in an IPO
1. Overvaluation Risk
If priced too high, IPO may list at a discount.
Example:
Issue: ₹500
Listing: ₹450
Loss: ₹50/share × 100 shares = ₹5,000 loss
2. No Public Trading History
IPO companies lack past stock data. You depend on their documentation, which may not reveal future risks.
3. Misleading Grey Market Premium (GMP)
GMP is unofficial and can be wrong. Don’t rely on it blindly.
4. Market Volatility
Even good companies may list poorly if market crashes during IPO listing day.
5. Allotment Risk
Oversubscribed IPOs are allotted via lottery. No guarantee of getting shares.
Math Example
You apply for 1 lot (100 shares):
Issue Price: ₹150 × 100 = ₹15,000
Scenario 1: Listing ₹180 → ₹3,000 gain
Scenario 2: Listing ₹130 → ₹2,000 loss
Should You Invest?
Ask:
- Is the company financially strong?
- Is the valuation fair?
- Is market sentiment positive?
If yes, then the IPO might be worth investing in.
Final Thoughts
IPO investing offers great opportunity — and great risk. Don’t follow the crowd. Follow the facts. Analyze every IPO like a business deal, not a lottery ticket.