When the Initial Public Offering (IPO) market is active, the new stocks appear promising and worth pursuing. However, investors may run the risk of overlooking the associated risks when they only focus on the potential return.

When subscribing to new shares, investors may hope to secure one or two board lots, or even more. Should the share price surge upon listing, a bigger number of allotted shares will mean a higher return. However, IPOs, even the popular ones, do not always perform well. If the share price falls below the offer price, a bigger allotment will result in a greater loss.

If the shares are significantly oversubscribed, investors may only receive a fraction of the shares they applied for, or no shares at all. On the other hand, if the IPO turns out to be not as popular as expected, the investors may receive all the shares they applied for.

Some investors may increase their subscription amount using margin financing to increase their chances of success with allocation. Regardless of whether the final subscription response is strong or not, this tactic will increase the risks of investing in an IPO.

If the subscription response is weak, those who subscribed using margin financing may have to take up all subscribed shares and be allotted more shares than expected. Investors are usually required to pay the full subscription cost, which may impose financial pressure. On the other hand, if subscription response is robust, investors will only receive a small allocation of shares. The total return after the stock is listed may fall short of covering the interest expenses incurred from margin financing.

Some brokerages and banks offer attractive credit facilities for clients to gear up their applications for IPO shares. While these loan packages may seem attractive, investors should bear in mind that they still have to pay the financing costs even though they are not allotted any shares.