What is Grey Market Premium in IPO?

There is a belief that the size of the IPO fund is directly correlated with the stock price during the initial three trading days. However, it is also true that the stock price may fall during the first three trading days, even if the fund is strong. Consequently, the idea of a “Grey Market Premium”(GMP) emerges. GMP of IPO is the difference between the stock price before and after the initial public offering.

The grey market is a popular method of trading stocks in India that occurs outside the stock market, in a space between approved and unapproved trade. Many participants conduct this type of trading, resulting in fixed prices. Grey market IPOs have been common practice since the IPO was first introduced due to several factors. 

Here is all you need to know about the IPO GMP and its significance in the stock market. 

What is GMP in an IPO?

The GMP, a metric of market demand for a stock, is employed to determine an investor’s interest in a forthcoming initial public offering(IPO).

Initial public offerings(IPOs), are frequently used by businesses to obtain capital by selling shares to the general public. For instance, Facebook’s initial public offering raised almost $16 billion. However, the “IPO grey market premium” is a step in the IPO process that many people are unaware of. Despite the term being used less frequently, the meaning of the phrase and how it impacts the IPO process are still unclear to many individuals.

Before a security is listed on a public exchange, the GMP can be used to gauge demand. GMP can help assist with investing decisions, but it is not an assurance of future price fluctuations.

How does Grey Market Work?

There are two methods to make money in the grey market. First, you can purchase or sell IPO shares on the grey market before they are listed on the stock exchange. The second option is to sell your IPO application for a specific sum of money. Let’s take a closer look at each of these options separately:

Grey Market Trading of IPO Allotted Shares

  • Investors can apply for shares with the IPO. They run the risk of not receiving any shares or receiving shares but having them trade lower than the issue price. These are the sellers.
  • There aren’t many people who believe the share is worth more than the issue price. They begin accumulating these shares before they are distributed via the IPO allotment procedure. These are the buyers.
  • Buyers make deals to purchase IPO shares at a specific premium by contacting grey market dealers.
  • Grey market dealers contact the sellers who have requested to sell their shares.
  • The agreement is completed if the seller accepts the GMP. Later, the dealer notifies the buyer of the acquisition and obtains the seller’s application information.
  • The allocation of shares to the seller may or may not occur.
  • If the stocks are allocated, the seller must sell them on the open market or transfer them to the buyer’s Demat account and pay the difference.
  • The transaction is terminated without a payout if the seller is not given shares.

Trading IPO applications on the Grey Market

  • The buyer and the seller are the two parties involved in the transaction. The buyer wishes to purchase the complete application of shares since he is optimistic about the issue.
  • On the other hand, the seller wants to make a profit before the stocks are listed. The kostak rate is the name given to this profit.
  • Through a grey market dealer, the buyer gets in touch with the seller and makes a kostak price offer to purchase the application.
  • The seller secures their profit when they sell the application. He can keep the kostak sum even if the stocks are not allocated.
  • The transaction is complete if the seller decides to sell the shares. The dealer notifies the buyer of the acquisition and obtains the seller’s application information.
  • If the shares are allocated, the dealer approaches the seller and requests that he either sell the shares at a specific price on listing or transfer the shares to the buyer’s Demat account.
  • The deal is cancelled if stocks are not given to the seller. The seller’s profit is, however, represented by the kostak rate.

What are the parameters for GMP in the stock market?

There is no direct answer to this query since the grey market premium parameter can change based on various variables, including the general market environment, the particular share being traded, and the trade time.

Conclusion

Although the IPO GMP varies from firm to company, it is typically 20% more than the IPO price. 

It is safe to avoid the grey market because legal authorities do not regulate it. However, the rates offered on the grey market might be a reliable predictor of how well an IPO would go. Investors purchase on the first day of listing to profit quickly by obtaining this premium. 

We hope you find this article helpful!