IPO (Initial Public Offering) is a type of public offering where shares are sold to institutions, who in turns, sell their shares to the general public. There can be a number of reasons for starting an IPO, however, the primary reason is to increase the liquidity. Furthermore, the IPO can also offer the companies with various secondary advantages. The investor can benefit greatly by investing in IPO, however, the investor must become aware of the risk factors before finalizing the decision. In this blog, the 5 major risk factors involved in applying for an IPO are discussed.
1. No guarantee of getting the shares:
The biggest risk factor in applying for an IPO is that you will not guarantee of receiving the shares. The mechanism of buying pre IPO shares distribution is subscription based, which means that any number of individuals can apply for it. Regardless of the number of the applied individuals, the company will allot shares on a proportional basis. If you are a small-time investor and the number of individuals is many then the allotment mechanism of pre IPO shares in India will hardly get you any share.
2. Getting less than the offered rate:
When you buy pre IPO shares, you run the risk of receiving less sum than you invested. This because the actual price of the pre IPO shares are determined only after it is listed and there are many cases where the listed price of the share turned out to be less than the purchase price. If such a thing happens with your selected company, you will inevitably lose the invested principal amount.
3. A number of variables determine the profitability of your investment:
You can buy pre IPO shares from companies from different backgrounds, however, not all companies can give you good returns since the price of the IPO is determined by a number of different factors, such as the fragility of that industry, its past performance, performance of an affiliated company, and so on. A problem in any of the determining variable can reduce the IPO price, thus reducing your overall returns. This unpredictability of IPO shares in India is one of its greatest risk factors.
4. External influences can affect the price:
Companies do their business in areas where government legislation play definitive roles. If you buy pre IPO shares in India in such companies, you again enter into in an uncertain territory since the legislation is not in your control and may change in accordance with the present political discourse.
5. Money gets locked for some time:
Once you buy pre IPO shares, your money will remain with the company till the prices of the shares are determined and listed. Thus, by investing in pre IPO shares, you inevitably reduce your liquidity.