You may have heard from your broker saying that the IPO is bidding at a gray market premium or at a gray market discount. What is gray market and what do you understand by grey market premium? Here we will discuss these terms in details.
Grey Market Premium of IPOS
Is the grey market a part of the IPO market?
Gray market is an informal market whereas IPO market is an official and recognized means of raising funds in the market within the guidelines of SEBI.
There is no official relation between IPO market and IPO grey market. You know what is IPO in stock market but it is also important to know about gray market in IPO.
Why do IPOs trade in the gray market before they are listed?
Let us clarify here that the gray market is an informal market where interested traders can bid and offer shares for the upcoming IPO.
These are not the actual shares of the IPO but something like an informal forward on the shares.
Is the gray market like any other organized exchange or market?
Since it is an informal market, businesses are largely conducted over the telephone.
Before the company is listed, these grey market traders will start bidding on IPO shares based on factors such as institutional appetite, retail appetite, extent of oversubscription, reputation of promoters, etc. Gray market prices will be determined by demand and supply.
if the gray market doesn’t issue shares, what does it issue?
A grey market is a market that largely operates on trust. It is a small group of people who place bids and offers for IPO stocks at various prices.
Many investors and brokers view the gray market as a rough indicator for a stock’s post-listing performance.
There are informal contracts represented by slips of paper and the transaction is purely based on mutual trust.
Who all see grey market value?
For retail investors, grey market prices are indicative of post-listing performance.
For HNI investors, it gives them an indication of appetite for the stock and helps them decide how much to apply for in an IPO.
For IPO financiers, it gives them an idea whether IPO financing can be a lucrative business proposition.
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Grey market premium (GMP)
Grey market premium meaning is somewhat easier to understand. The IPO represents the grey market premium that speculators are willing to pay over the discovered price of the IPO.
for understanding; What is GMP in IPO Markets One must understand how unofficial premiums for IPOs are set.
What is Kostac and Kostac Price?
Kostac is the colloquial term for the value of the application. In order to understand what is a Kostac in an IPO, you need to understand what Kostac rates mean. This is the price at which you can actually sell your application in the IPO gray market and higher demand means a higher IPO cost price.
Does SEBI regulate grey market?
As mentioned earlier, the grey market is an informal market and operates outside the purview of SEBI regulation.
Any trades or bids made in the grey market do not have any authorization or approval from the regulator or the stock exchanges.
Remember, prices fluctuate wildly in the grey market because there is no circuit filter working.
This means, unlike normal trades, the gray market is not guaranteed?
Yes, you are at a counterparty risk when you buy and sell shares in the gray market. Since it is not a SEBI regulated market, the regulator usually bars retail investors from participating in these markets. Unlike exchange business transactions, where the clearing corporation is the counterparty, the gray market is open to fraud by the other party. To that extent, it is more like a forward market.
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Understand grey market with an example?
Let us assume that you have applied for 800 shares in the IPO and you have been allotted 400 shares. In the gray market, the stock is bidding at a premium of 45%. Presumably, you can sell these shares in the gray market and lock in the prices. If the stock is listed at a 20% premium you make a profit but if the stock is listed at a 100% premium you incur a loss. Here we would like to add that this is an unregulated market and therefore it is vulnerable to counterparty risk.
Detailed Video on Grey Market Premium
How Can Investors Get the Best Out of the Grey Market?
As introduced earlier, gray market is a closed market which operates outside the purview of SEBI regulations. Therefore all transactions are in the form of forward transactions and are open to counterparty risk. At best you can see gray markets as an indicator of the listing price. Again, don’t take them too seriously, as even such gray market prices are subject to manipulation.
The IPOs of Thyrocare and Ujjivan Financial are currently open in the market and both these issues are getting good response in the gray market. There are reports that Thyrocare IPO is trading at a premium of Rs 200, while Ujjivan Financial is trading at a premium of Rs 55. But what is this gray market, how is the trading done here, let us know.
The gray market is an unofficial platform to deal in IPOs. It is popular even though it is illegal. Selected people trade in it. Ahmedabad, Mumbai, Delhi, Rajkot are the major centers of IPO gray market. This business is also done in Jaipur, Indore, Kolkata.
Now let us know what is gray market premium? The price at which trades take place is called the premium, indicating the estimated listing price.
Gray market does not have an official exchange like BSE or NSE. In this, trading takes place over the phone with mutual trust. For this, it is necessary to have personal contact of the operator. There is no guarantee of completion of the transaction in the gray market. The deals are reserved for the day of listing on NSE or BSE. The gray premium is the settlement of the difference in the trading price in cash. It also deals in small retail applications.
One of the reasons why grey markets are so popular is that it signals the response to any IPO. The idea of listing the company comes up. Many big investors invest money in gray market instead of IPO. This is an attempt to take advantage of the listing.
Explain to investors that the gray market is unofficial and illegal, there is a risk of the transaction not being completed, as well as the gray premium cannot be fully relied upon. Make sure to look at the company’s fundamentals and valuations. Invest money in IPO only on the basis of fundamentals and valuation.
FAQ (Questions & Answers)
Can a Retailers buy the shares in Grey Market ?
there are no official people or business where a retailer can approach for IPO Grey Market, but who want to buy or sell IPO stocks in Grey Market, they need to find a local dealer who can find buyers or sellers for them.
Nirmal is a NISM Certified Derivative Trader & the Founder of InvestandEarn.net (Financial Blog). He entered the world of Equity research to explore his interests in financial markets having 5+ Years of Experience in Share Market Trading & Investing. Nirmal frequently writes about Share Market Trading & Investment and publishes his personal view on the market. Drop him a mail at email@example.com.