Stock market investments can be made through primary or secondary markets. The primary market, also known as the IPO (initial public offering) market, allows investors to buy securities directly from the issuing companies before these stocks start trading on exchanges, which is the secondary market.
The primary market in India is still nascent when compared to the secondary stock market. Though recent years have seen a flurry of initial public offerings (IPOs) hitting the markets, retail investors still struggle to pick the right companies at the right prices due to a lack of knowledge.
This article will give you a detailed walkthrough of the dos and don’ts of investing in the IPO market.
Key Takeaways
- The first step is to read the IPO’s red herring prospectus thoroughly. Familiarise yourself with the company’s financials, risk factors, and objectives of the issue. Do not focus on the buzz and marketing noise.
- You should then judge the company based on its fundamentals and promoter track record, and not rely heavily on the opinions of its underwriters and backers.
- Compare the IPO's pricing with that of its peers. You can use metrics like price-to-earnings ratio, price-to-book value, etc., for the same.
- Only once you are convinced, apply through a SEBI-registered broker and an official ASBA or UPI channel. Never invest through unverified links or agents.
- Do not invest for short-term gains. Borrowing money to invest in an IPO on the basis of the grey market premium (GMP) chatter can land you in trouble, as allotment and listing gains are never guaranteed.
What is the IPO Market?
The IPO market, or the primary market, is where a company sells shares directly to investors for the first time before that stock starts trading on an exchange. Merchant bankers and underwriters manage the process, set the price band, and publish a prospectus that lays out the company’s financials, the promoter's background, and the risks associated with the business.
Once the offer closes, shares are allotted to investors. Trading then shifts to the secondary market, or exchanges, where stock prices are determined by ongoing supply and demand. The key differentiator for a primary market is that since the purchase of shares happens before any public trading history, the burden of research shifts almost entirely to the investor.
Dos of Investing in the IPO Market
These are the checks worth making before you commit money to any IPO:
1. Read the Prospectus
India’s stock market regulator, the Securities and Exchange Board of India (SEBI), requires every company that wishes to float an IPO to publish a red herring prospectus covering the promoter’s background, financial statements, and risk factors. Read it thoroughly rather than relying on brokerage notes or news websites. If anything in the document appears inaccurate or incomplete, contact the merchant bankers or compliance officers named in the filing for more details.
2. Assess Promoter Background and Fundamentals
A company’s long-term prospects rest heavily on who the promoters are. Look at their experience, past ventures, and any record of regulatory trouble. Also, study the company’s revenue growth, margins, and debt levels over the years. Strong fundamentals and the right pricing are two factors that should not be compromised when investing in a new company.
3.Check the Objectives of the Issue
This is the biggest catch that most small investors miss. Check what the company plans to do with the IPO money. Whether it is using the capital raised to fund its expansion and repay debt, or simply providing an exit option to early stakeholders, such as private equity firms, through an offer for sale (OFS). This would tell you the real purpose of the IPO and whether the issue fits your investment goals.
4.Check the Valuation Against Listed Peers
Compare the IPO’s price band with the pricing of listed companies in the same sector using metrics such as P/E, P/B, or EV/EBITDA. If an issue is priced well above its peers, it must be backed by a correspondingly strong growth case to justify the premium. If not, then maybe you are being asked to pay more than justified.
5.Verify Whether the Broker or Agent Is SEBI-Registered
SEBI makes registration mandatory for every stockbroker and intermediary that handles IPO applications. Confirm this before doing any IPO transaction, since dealing with an unlicensed agent adds risk with no upside. Applications should route through your own demat account using ASBA or UPI, with funds blocked rather than debited until allotment is confirmed.
6.Track Allotment and Refunds After Applying
After the IPO closes for bidding, monitor the allotment status through the registrar’s website or your broker’s platform. If shares aren’t credited despite a successful allotment, or a refund is delayed, take it up with the issuer’s investor grievance or compliance team without delay.
Don'ts to Keep in Mind
1.Don't Get Swept Up by Market Hype
Marketing heavily around an IPO is now a common practice. Too much chatter around the grey market premium (GMP) is also unhealthy. GMP is unofficial, thinly traded, and easy to manipulate. It does not reflect the company’s actual worth. So, avoid getting trapped in this game and base your decision on the prospectus and financials instead.
2.Don't Invest in a Business You Don't Understand
If you can’t explain in simple terms how a company earns its money, it is a clear signal to slow down and reassess. Complex business models or unfamiliar sectors deserve extra research before you commit capital.
3.Don't Lean on Big Underwriter Names Alone
A well-known investment bank backing an issue is in no way an indicator of the kind of returns you will see. Underwriters earn their fees irrespective of the stock’s performance after listing. So, don’t fall under the weight of heavy names.
4.Don't Expect Guaranteed Listing Gains
Most investors nowadays apply purely hoping for a listing-day bonanza. The opening price can depend on a number of micro and macro factors. So, a strong debut can never be guaranteed.
5.Don't Apply With Borrowed Money
Funding an IPO application through a loan or margin adds interest cost on top of investment risk. If the stock trades flat or below the issue price, you will be carrying a loss and a repayment obligation.
6.Don't Ignore How Market Cycles Affect an IPO
A bullish market can push even average companies towards a strong listing, just as a weak market can drag down a genuinely good company on its debut day. Evaluate whether the company is a good long-term bet or can perform across market conditions.
Dos and Don’ts at a Glance
| Dos | Don’ts |
| Read the full prospectus, not just the summary | Don’t apply on the strength of advertising or buzz alone |
| Check promoter history and financial trends | Don’t skip diligence because a big-name banker is involved |
| Compare IPO pricing with listed peers | Don’t assume that a high subscription number means fair pricing |
| Apply only via SEBI-registered brokers and ASBA/UPI | Don’t pay through unofficial links or agents |
| Size your bid as per the money you can hold long term | Don’t apply with borrowed funds or with money needed elsewhere |
Conclusion
Investing in the IPO market is not about quick money. It is about preparation and patience. The prospectus, the company’s fundamentals, and a fair sense of valuation will tell you much more than the grey market premium or subscription numbers. Choose the issue on the basis of its own merits, apply only through verified channels, and size your commitment to money that you can afford to hold for the long term.
Also Check: Upcoming IPO in 2026
