What is IPO Grey Market?
An IPO grey market can be a place where shares of a company are traded informally by traders. This happens before the issue of shares in an IPO by the corporate.
Since this is often an informal market, there are no rules and regulations. The Securities and Exchange Board of India (SEBI) is not involved in these deals. Even the regulator does not support it.
Since it is an informal market, there are no rules and regulations in the grey market. Market regulators like SEBI (Securities and Exchange Board of India) do not track gray market transactions. Even the regulators do not support it.
The Grey market is run by a small group of individuals. Trading in the grey market is done on the basis of mutual trust. Typically, companies that choose to launch IPOs opt for reality checks within the grey market. The company does this to serve a number of purposes; For example; To ensure that the demand assessment is done for the pending IPO or IPO evaluation.
What is Grey Market Premium (GMP)?
The grey market premium is simply the price at which the shares are being traded in the grey market.
For example, assume that the expected price for stock XYZ is Rs 200.
Now, if the grey market premium is Rs 300, it means that a private company is ready to buy shares of XYZ at Rs. 300 (200+300).
This is how shares are traded in the grey market. Now let's understand this with other examples:
Let the cost of ABC be Rs 200. The grey market premium of ABC is Rs 50. In the given condition, GMP is positive. Since the premium is positive, ABC's shares are trading at Rs.250. 200 + Rs. 50 = Rs. 250.
Now let us assume that ABC's GMP in this scenario is Rs. -30. Issue price is Rs. 200. As soon as the grey market premium turns negative, it shows that the shares of Reliance Nippon Sellers are trading at a loss of Rs. 30 i.e. Rs. 200 - Rs. 30 = Rs. 170. This means that if you are in an IPO
If you apply, you may have to suffer a loss on the listing day itself.
GMP is very unstable. Unless the shares are listed for trading on the market, volatility remains within the grey market premium price.
Why is grey market trading done?
The grey market has existed for a long time, with many investors and traders swearing by the grey market. This is because it provides retail investors with an honest chance of getting shares even before they are listed; If retail investors are assured that the share price will increase in the near future. It supports almost demand and provides position.
Another reason often occurs when traders want to exit an IPO even before they are listed on the stock market is because the grey market provides them with the right answer.
In addition, it allows the investor to take a position in IPO shares even if they need to miss the instrument's deadline or if they need to get more shares out of the IPO application than they can provide.
Why do companies allow grey market trading?
grey market trading takes place even before the corporate is listed on the exchanges. Underwriters often use trading in these markets to estimate an accurate IPO valuation. These help market underwriters summarize the demand and future path for a corporate once it gets listed on the exchanges.
Also, there is a minimum delay of 6 days before getting listed on the stock exchanges. Since time is money, underwriters want to initiate sales and, thus, are willing to sell shares within the grey market.
Final thoughts
A grey market IPO is useful for various groups such as IPO issuing companies, underwriters, start-ups, formerly large companies, and most importantly traders.
Even though the grey market is unauthorized, traders give an undertaking for it as they can buy shares that are not listed on the exchanges and the share price is likely to rise in the future.
However, it is always wise to consider all the aspects, risks, and benefits before investing, be it the regular market or the grey market.
We can suggest to you some websites from which you will be able to know the gmp (grey market premium) of any upcoming IPO easily.
I hope you understand very well the grey market premium. if you have any suggestions, please comment below.
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