Initial Public Offerings (IPOs) can give retail investors an opportunity to invest in companies entering the public markets. However, an IPO is not automatically a good investment simply because it is heavily subscribed, widely discussed or expected to list at a premium.
Retail investors can make avoidable mistakes when applying for IPOs, particularly when decisions are driven by short-term market excitement rather than the company’s fundamentals. Understanding these mistakes can help investors approach IPOs more systematically.
1. Investing Without Reading the RHP
One of the biggest mistakes is applying for an IPO without examining the Red Herring Prospectus (RHP) or other official offer documents.
The RHP contains information about the company’s business, financial performance, promoters, risks, litigation, debt, related-party transactions and the intended use of IPO proceeds.
Instead of reading the entire document without a plan, investors can focus on sections such as:
- Risk factors
- Business overview
- Financial statements
- Objects of the issue
- Promoters and management
- Outstanding litigation
- Related-party transactions
- Debt and liabilities
SEBI provides public-issue filings so investors can access official offer documents before making investment decisions. (sebi.gov.in)
2. Applying Only Because an IPO Is Popular
An IPO can become popular because of media coverage, social-media discussions, celebrity endorsements or strong subscription numbers.
However, popularity does not establish the financial value of a company.
A heavily subscribed IPO can still experience price volatility after listing. Similarly, a less-publicised company may have completely different financial characteristics.
Investors should therefore distinguish market attention from fundamental information.
3. Focusing Too Much on Grey Market Premium
Grey market premium (GMP) discussions are common before IPO listing.
Some investors treat GMP as an indication of the price at which the stock will definitely list. That is not reliable.
Grey-market activity operates outside the formal stock exchanges and can change rapidly. It should not be treated as a guaranteed listing-price indicator.
The official IPO price and subsequent market price are determined through regulated processes and actual market activity.
4. Ignoring Valuation
Another common mistake is looking at the company’s growth without considering how much investors are paying for that growth.
A company can have strong revenue growth and still be expensive relative to its earnings.
Investors can examine valuation metrics such as:
- Price-to-Earnings (P/E)
- Price-to-Sales (P/S)
- Enterprise Value-to-EBITDA
- Return on Equity
- Earnings growth
These figures should be compared with appropriate listed peers rather than viewed in isolation.
A high valuation does not automatically make an IPO unsuitable, but it means investors need to understand what future growth is already reflected in the price.
5. Assuming Listing Gains Are Guaranteed
Some retail investors apply for IPOs primarily because they expect the shares to list above the issue price.
But listing gains are never guaranteed.
After listing, the share price depends on market demand, company expectations, financial results, industry conditions and broader market sentiment.
Even an IPO that receives strong subscription can trade below its issue price after listing.
Investors should therefore distinguish between a short-term listing strategy and a long-term investment strategy.
6. Applying for More Lots Just to Increase Allotment Chances
Investors sometimes assume that applying for more lots automatically increases the probability of receiving shares in an oversubscribed retail category.
The actual allotment process depends on the applicable category-wise rules and basis of allotment.
In heavily oversubscribed issues, the applicable methodology can result in many valid applicants receiving only the minimum lot or no allotment.
Therefore, investors should understand the IPO’s allotment rules instead of assuming that a larger application guarantees a larger allocation.
7. Ignoring the Company’s Debt
Revenue and profit figures often receive significant attention, but debt deserves equal consideration.
Check:
- Total borrowings
- Short-term and long-term debt
- Interest expenses
- Debt-to-equity ratio
- Debt repayment plans
- Whether IPO proceeds will be used to repay debt
A company may be growing rapidly while carrying substantial financial obligations.
The RHP and financial statements can help investors understand the company’s debt position.
8. Looking Only at Profit and Ignoring Cash Flow
Accounting profit does not necessarily mean that a company is generating strong cash.
Investors should examine cash flow from operating activities and compare it with reported profit.
If profits are consistently positive but operating cash flows remain weak, investigate the reasons.
Working-capital requirements, increasing receivables, inventory or other factors can create differences between reported profits and actual cash generation.
9. Ignoring Customer and Supplier Concentration
A company may depend heavily on a small number of customers or suppliers.
If a significant portion of revenue comes from one customer, losing that customer could materially affect the business.
Similarly, dependence on a single supplier can create operational risks.
The RHP generally provides information about major customers, suppliers and concentration risks where material.
10. Not Checking How IPO Funds Will Be Used
Investors should determine why the company is raising money.
IPO proceeds may be used for:
- Capital expenditure
- Debt repayment
- Working capital
- Acquisitions
- Expansion
- General corporate purposes
A fresh issue can provide capital directly to the company, while an offer for sale (OFS) involves existing shareholders selling their shares.
Understanding the difference helps investors determine where the money raised through the offering is actually going.
11. Ignoring Promoters and Related-Party Transactions
Promoters can have significant influence over the company’s strategy and operations.
Investors should examine promoter background, shareholding, experience and disclosed legal or regulatory matters.
The related-party transactions section also deserves attention. Transactions involving promoter-group companies or other related entities can be relevant when assessing how business is conducted within the corporate group.
12. Applying Without Checking the Lot Size and Investment Amount
Retail investors sometimes focus on the IPO price per share without calculating the actual minimum investment.
For example, an IPO priced at ₹100 per share may have a lot size of 150 shares, making the minimum application amount ₹15,000.
Investors should calculate:
Minimum investment = Issue price × Lot size
They should also ensure that sufficient funds are available for the application and understand how ASBA or UPI-based fund blocking works.
13. Using Incorrect UPI or Bank Details
Technical mistakes can affect an IPO application.
Common problems include:
- Incorrect UPI ID
- Insufficient funds
- Failure to approve the mandate
- Using an ineligible third-party account
- Incorrect PAN or demat information
Investors should verify all details before submitting the application and approve the UPI mandate within the applicable deadline.
14. Putting Too Much Money Into One IPO
Even when an IPO appears attractive, concentrating a large portion of available investment capital in one company can increase portfolio risk.
A diversified approach considers how the IPO fits into the investor’s existing holdings, financial objectives and risk capacity.
The fact that an IPO is new to the stock market does not eliminate the risks associated with owning an individual company.
15. Making Decisions Based on Emotions
Fear of missing out, excitement over subscription figures and anxiety about listing-day movements can lead to impulsive decisions.
Investors can reduce this risk by establishing their investment criteria before applying.
For example, they can decide in advance:
- Why they are applying
- Their investment horizon
- What valuation they consider reasonable
- What risks they are willing to accept
- Whether they intend to hold or potentially sell after listing
Having a defined framework can make it easier to respond rationally when market prices move sharply.
A Practical IPO Checklist
Before applying, retail investors can ask:
| Question | What to Examine |
| What does the company do? | Business model |
| Is it financially stable? | Revenue, profit and cash flow |
| How much debt does it have? | Borrowings and interest |
| Why is it raising money? | Objects of the issue |
| Who are the promoters? | Background and ownership |
| Is the valuation reasonable? | Peer comparison |
| What could go wrong? | Risk factors |
| Is the issue heavily dependent on a few customers? | Customer concentration |
| What is the minimum investment? | Price × lot size |
| Why am I applying? | Investment objective |
Conclusion
Investing in an IPO requires more than submitting an online application. Retail investors can make costly mistakes by following hype, relying on grey-market premiums, ignoring valuation, overlooking debt or cash flow, or assuming that listing gains are guaranteed.
A more structured approach is to study the RHP, business model, financial statements, cash flows, debt, promoters, risk factors, valuation and use of IPO proceeds before applying.
Most importantly, an IPO should be evaluated as an investment in a real business rather than simply as an opportunity for quick listing gains. Market conditions can change, and even companies with strong businesses can experience substantial share-price volatility after listing. A careful, information-based approach can help retail investors understand both the opportunities and the risks involved.