When a company decides to go public and offer shares for sale to general public, it must do so through an initial public offering (IPO). Most beginners believe IPOs are always profitable ventures to make profits without much effort. But IPOs come with some risks for the individual investor. Here’s a look at some potential risk involved with investing in IPO.

• Your capital will be locked for few weeks to months (based on when you apply for the IPO).
• There is no guarantee about allocation of shares. Usually the competition will be high, and most retail traders will get smaller allocation in most IPOs.
• The most obvious risk when buying IPO stock is that the company may not be successful, and the value of the stock may drop sharply soon after going public.
• Another risk associated with IPO stocks is that they may be subject to “flipping”. Flipping occurs when investors buy IPO stocks and then quickly sell them for a profit once the stock price goes up. This can cause the stock price to become artificially inflated and may lead to sharp drop in price one flipping stones.

Investing in IPO stocks can be risky, but it can also be rewarding if an investor gets the complete allocation of shares and the company is successful. If you are considering investing in an IPO, be sure to do your homework first, be aware of the potential risks involved deploy only a small portion of your capital.

In India, there are primarily two types of IPOs (Initial Public Offerings):

1. Fixed Price Offering

In a fixed price offering, the company sets a specific price for its shares before the IPO. Investors know the price upfront and can buy shares at that price. This method is straightforward and eliminates the uncertainty of price discovery during the IPO process.

2. Book Building Offering

In a book building offering, the company provides a price band (a range within which investors can bid). Investors place their bids within this range, and the final price is determined based on the demand. The lowest bid is known as the floor price, and the highest bid is the cap price. The final price is set based on the bids received, and shares are allocated accordingly.

Investor Categories

In both types of IPOs, there are different categories of investors:

• Qualified Institutional Buyers (QIBs): These are institutional investors like mutual funds, foreign portfolio investors, and insurance companies.
• Non-Institutional Investors (NIIs): These are high net worth individuals who can invest more than INR 200,000.
• Retail Individual Investors (RIIs): These are small investors who can invest up to INR 200,000.
• Employees: Some companies reserve shares for their employees as part of the IPO

Advantages and Disadvantages

Advantages: IPOs provide companies with access to capital for expansio, increase visibility, and can offer investors the opportunity for significant returns.

Disadvantages: Investing in IPOs can be risky, as the stock price may fluctuate after listing, and not all IPOs perform well in the long term.