Assume that I subscribe to an IPO at 1000rs and when it begins trading, its price decreases because IPO subscribers are selling the stock. Why do they subscribe if they're going to sell at a lower price on the listing day?
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1 Answer
In most cases the subscribers to an IPO are institutional investors - investment banks who want to act as market makers for the instrument. They may also buy for their prop. book and to pass on to investors who have subscribed through them but primarily since the market is going from no available liquidity to some available liquidity a market maker needs to provide that. If they are providing liquidity to the market they will sell at the price that people are willing to buy at and don't (particularly) want to hold on to the stock as it increases their trading book (market making) risk. If there are fewer non-institutional investors that want to buy and the banks overestimated the market demand for stocks this will result in the IPO being priced at too high a price to be sustained after the stocks start trading and the price will drop.
Pricing an IPO isn't an exact science and it requires the underwriters and institutional investors to estimate the NPV of the expected future cashflows of the company and the amount of investors interested in holding the stock. Neither of these factors are easy to measure so it is common that the subscriber price for an IPO is very different to the sustainable market price of the stock and so in the day or so after the IPO the price falls or rises to that level, sometimes precipitously.
