Significance & Risk Factors for Investing in IPO


When you choose to invest in IPO, you must remember that it has certain merits as well as demerits. On one hand, it involves a great degree of risk but if it successful, it might result into handsome returns for the investor. After all the golden rule of investment is: Higher the risk, higher the return!

The firm comes out with an IPO in accordance with its set of objectives while you as an investor might invest having your own set of objectives. So, we can study importance from the angle of both: the company and investors.

Importance to the Company:

A firm, that is need of additional capital, either can borrow cash or sell shares in order to raise funds. Else, it has the option of “Going Public”. Most of the times this is believed to be the best option since:

  1. Costs involved with IPO are much lesser than the high costs of borrowing.
  2. One does not have to worry about repayment, as the capital raised is not required to be repaid.
  3. When stocks are sold to public, more often than not could lead to share price being appreciated because of certain market factors which aren’t directly linked to the firm.
  4. It provides the firm an opportunity to tap a large pool of investors who give their money to the company for future growth.

Importance for Shareholders:

It is common for investors to consider IPO as an easy way to churn money. The most appealing characteristic of an IPO is that generally shares are priced pretty low, and that there is possibility of the firm’s stock price rising on the day of shares being offered. Speculative investors, who look after making short term profit, consider this as a good opportunity. Such investors seek to get immediate returns and are less keen on long term gains.

By and large, people consider that to invest in an IPO is pretty simple and free of hassles, yet it involves risk and quite many investment advisers shall suggest you to not invest in it until you have sufficient knowledge and experience. The possible risk factors could be due to:

1. Unpredictable

Unpredictability of IPOs is one of the key reasons as to why investment advisers ask investors to stay away from IPOs. Shares are usually offered at lower prices, but we see significant changes during the day they will be offered. There are possibilities that they may rise sharply during that day and then fall steeply the next day.

2. Potential of the Stock Market

Stock Markets, being subject to high volatility, investments in an IPO do not guarantee returns. The fluctuations in the markets affect not only households and individuals but the entire economy. Due to this volatility it is not easy to predict how the share will perform over a period of time as profit as well as the risk potential of the IPO is dependent on the condition of the markets at that particular time.

3. No Past Track Record of the Company

Shareholders dilemma increases as to whether or not to invest in that IPO as the company’s track record is not available. There is no basis for making decision for investment in the absence of track record.

Risk Assessment:

The probability of buying shares in a capable new firm and finding the subsequent success story has captivated quite many investors. But prior to taking the big step, it is very important to understand some of the challenges, key risks and likely rewards associated with investing in an IPO. This has made RISK ASSESSMENT an imperative task in Investment Analysis. Higher the desired returns, higher shall be the degree of risk involved. Hence, a meticulous study of risk attached with the investment must be done prior to taking any consideration.

To invest in an IPO, it is vital not only to have knowledge about the functioning of an IPO, but we also need to know about the company in which we intend to invest. Therefore, it is essential to know:

  1. The fundamentals of the firm
  2. The policies and the goals of the company
  3. The products and services offered by the business
  4. Their key competitors
  5. Their share in the current market
  6. The probabilities of their issue being successful

It can be very risky to invest without having this basic knowledge about the company.

Let us consider 3 types of risks concerned in investing in IPO:


It is essential to note if the firm has sound business and management policies that are in line with the standard norms. Researching business risk involves probing into the business model of the company.


Is the firm solvent and has enough funds to bear short-term business setbacks? The liquidity position of the company has to be considered. Researching financial risk calls for analyzing the company’s financial statements, capital structure, and such financial information.


It is advisable to check out the demand for the IPO in the market, i.e., the appeal of the IPO to other investors in the market. Hence, researching market risk involves examining the appeal of the corporation to current and future market conditions.

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