Understanding IPOs: Should You Invest?

by KarNivesh | 02 October, 2025

Understanding IPOs: Should You Invest?

Initial Public Offerings (IPOs) have become one of the hottest topics in India’s financial markets. Whether it’s chai-time discussions, WhatsApp groups, or trending hashtags on social media, everyone seems to be talking about the next big IPO. But what exactly is an IPO, and more importantly, should you as a retail investor put your hard-earned money into them? Let’s break it down in simple terms and explore both the opportunities and risks before making a decision.

What is an IPO?

An IPO, or Initial Public Offering, is a company’s first big step into the stock market. It’s when a private company decides to “go public” by offering its shares to ordinary investors. Before an IPO, ownership of the company is limited to founders, early employees, and big investors. But after the IPO, anyone can buy shares and become a partial owner of the business.

When you buy IPO shares, you’re not just buying a piece of paper – you’re purchasing a real stake in a business with assets, revenues, and growth potential. That ownership comes with certain rights, such as voting in company matters and receiving dividends when the business makes profits.

How Does an IPO Work?

The process of taking a company public is long and structured, usually spanning 6 to 9 months. It begins when a company decides to raise funds for expansion or when early investors want to exit. Investment banks, also known as underwriters, step in to help determine the company’s value and set the IPO price.

A detailed report called the Draft Red Herring Prospectus (DRHP) is then prepared. This acts as a report card for investors, containing financial statements, business plans, risks, and how the company plans to use the money raised. Once SEBI (Securities and Exchange Board of India) approves, the company markets its IPO through roadshows to attract large institutional investors. Finally, the IPO opens for the public, typically for 3-5 days, during which retail investors can apply for shares.

Why Do People Invest in IPOs?

One of the biggest attractions is the possibility of listing gains. For instance, IREDA’s IPO priced at ₹32 per share listed at an 87.5% gain, instantly rewarding investors. Similarly, Motisons Jewellers gave over 400% returns since its listing, proving how IPOs can unlock massive wealth.

Another reason is early access to growing companies. By investing in IPOs, you join a company’s growth journey at the start of its public life, often before it becomes a household name. IPOs also bring liquidity, as shares can be freely bought or sold in the stock market.

Further, SEBI regulations ensure fair allocation to retail investors through transparent systems, even when IPOs are oversubscribed. The strong regulatory framework provides an added layer of investor protection, ensuring companies disclose all necessary information.

The Flip Side – Risks of IPOs

While IPOs sound promising, they aren’t risk-free. Listing losses are common when stocks debut below their issue price. The much-hyped Paytm IPO, for example, listed at a 27% discount and has since lost about 65% of its IPO value, wiping out significant investor wealth.

Another risk is overvaluation. Market hype sometimes drives companies to set inflated prices, only for reality to sink in later. Companies like Nykaa and Delhivery experienced sharp corrections after their initial buzz faded. Newly listed stocks also face high volatility, with price swings of 20–30% in a single day not unusual.

Moreover, IPOs don’t guarantee allotment. With heavy demand, you might apply but not receive shares. Many IPOs also involve young companies with limited track records, making it harder to judge their future performance.

IPO Performance Comparison: Recent Success Stories vs Failures in Indian Market

How to Evaluate an IPO

To make informed decisions, follow these steps:

1. Read the Prospectus Carefully – Pay attention to the company’s business model, growth plans, and risks.

2. Check Financial Health – Look for consistent revenue growth, profitability trends, debt levels, and cash flows.

3. Understand the Purpose – IPO proceeds meant for expansion are better than those used mainly to repay debts.

4. Compare Valuations – Ensure pricing is fair compared to peers in the same industry.

5. Assess Market Conditions – IPOs perform better in bullish markets with strong investor sentiment.

6. Evaluate Management – Leadership experience and credibility often make or break long-term performance.

IPO Trends in India

India’s IPO market has been on fire. In 2024 alone, 158 IPOs raised over ₹1,71,000 crores, placing India among the top IPO markets globally. In fact, the National Stock Exchange ranked first worldwide in terms of funds raised.

Retail participation is growing rapidly, with over 12 million retail applications received for mainboard IPOs in just the first half of 2025. Interestingly, nearly 35% of these came from Tier 2 and Tier 3 cities, showing how equity investing is no longer limited to metro investors.

At the same time, risks are also evident. In 2025, more than 25 companies listed at significant losses, averaging 15–25% declines on debut. Clearly, IPO investing requires careful selection rather than blind excitement.

Success Stories and Lessons Learned

Some IPOs have been massive wealth creators. IREDA, listed at ₹32 in November 2023, has delivered over 486% returns. Renewable energy players like Premier Energies and Waaree Energies have also given investors over 118% returns, proving the strength of India’s clean energy transition. Even traditional businesses like Motisons Jewellers have delivered over 408% returns since listing.

But failures like Paytm, which raised ₹18,300 crores (now valued at nearly ₹21,850 crores in today’s terms), remind us of the risks. Its stock has lost more than 65% of its IPO value, teaching us that hype and high valuations cannot replace strong fundamentals.

Should You Invest in IPOs?

The answer depends on your personal situation. IPOs can be rewarding if you:

• Already have a diversified portfolio

• Can afford to risk some money

• Have time to research companies thoroughly

• Understand that IPOs are risky and not guaranteed money-makers

On the other hand, if you are new to investing, seeking guaranteed returns, or easily influenced by hype, it’s better to avoid IPOs until you gain more experience.

The Road Ahead

India’s IPO market is expected to keep growing, with a strong pipeline of companies preparing to go public. Increased retail participation, robust regulations, and new sectors entering the market all point to exciting times ahead. But with opportunity comes responsibility. Successful IPO investing requires patience, education, and discipline.

In conclusion, IPOs can be a powerful wealth-creation tool, but they are not a guaranteed ticket to riches. The key lies in doing your homework, avoiding herd mentality, and making rational decisions. If approached wisely, IPOs can be a valuable addition to a diversified investment portfolio and a gateway to participate in India’s economic growth story.