What are the risks associated with an IPO application?

It is a well-known fact that trading shares comes with its own set of risks, and the same is the case with IPOs. It is important to know these risks so that your trading decisions are aligned with your goals and risk tolerance. Here are some of the main risk factors in applying for an IPO:

The first risk is that you may or may not be allotted the shares. Filing a successful application does not guarantee the allocation of shares. Furthermore, you be allotted shares but lesser than what you had applied for. However, in such a case, the balance amount is unblocked and released back to your account.
Overvaluation is another risk in applying for an IPO. In this case, the share may list at a higher price than its actual intrinsic value. While this can be beneficial in the short term, once a market correction happens, the price can go down significantly reducing the value of your holdings.
Poor demand or a cold response to the IPO may mean the share debuts on the stock market at a price lower than what you paid for it, leading to an immediate loss for you.
Since the company issuing the IPO is not public yet, the information available on it is mainly through its website and draft red herring prospectus. Both of which, may not provide the holistic data that is needed before investing in a company.