Grey Market Premium: Legally shares are traded in the primary and secondary markets, which the stock exchanges facilitate. New shares are created and sold to the public in the primary market. An initial public offering is an example of a primary market. After getting listed, the shares are traded in the secondary market.
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Grey Market Premium
After getting listed, the shares are traded in the secondary market. Trades in the primary and secondary markets are facilitated by stock exchanges and regulated by the Securities and Exchange Board of India.
However, before being listed shares are informally traded in the grey market. The grey market for shares doesn’t is a closed, informal market that operates on trust rather than rules and regulations.
The grey market premium is not regulated by SEBI or any other legal authority, and the investor must bear any risks arising from operating in the grey market. The trades in the grey market are often carried through small chits of paper and unofficial dealers.
Grey market Premium stock
grey market stock refers to the shares of the company that are traded unofficially. When a company’s shares are presented by traders before their official IPO, it falls into the category of grey market stock.
Generally, a limited set of individuals runs the grey market stock, and it works based on trust between the individuals. It’s important to note that trading in grey market stocks in India is both legal and unofficial. However, any transactions conducted in the grey market cannot be settled until official trading through authorized channels commences.
Types of Grey market Premium trading
Trading in the grey market can be categorized into two types:
- Buying or selling the IPO shares that are allocated before they are listed in the stock exchanges.
- Buying or selling IPO applications at specific rates or premiums.
- Trading process of the gray market
- Similar to IPO shares trading, even IPO applications include sellers and buyers.
- Buyers determine the price of the application depending on multiple assumptions and market conditions. They give an offer to the sellers that they are willing to buy an IPO Application at a certain premium.
- To be on the safe side, sellers may sell their application at a certain premium to the buyer through a grey market dealer.
- Here, there is no need for the seller to worry about the share allotment in IPO. Even if he didn’t get any allotment he still gets the grey market premium at which he sold his IPO allocation.
- The seller sends the detailed form to the dealer. Further, the dealer sends a notification to the buyer that he bought an IPO application at a certain process
- Share allocation is determined by the issuing registrar, and sellers may receive or not receive an allotment of shares.
- If shares are allocated, sellers may transfer them to a Demat account or sell them at an agreed price. Settlement occurs based on profit or loss if shares are sold.
- If no shares are allocated, the transaction concludes without settlement, but the seller still receives the premium.
How Does IPO Grey Market Premium Work?
The grey market runs outside the authority of the stock exchanges or the SEBI. Let us try to understand how the grey market operates. Suppose the IPO of a company opens and Mr X applies for a certain number of lots in the retail category.
At the application stage, Mr X has no idea about the chances of allocation. Another investor Mr Y is also interested in the shares of the company. Mr Y wants surety in the allotment and hence, doesn’t want to proceed through the official channels.
My Y gets in touch with a grey market dealer to buy a certain number of lots in the IPO. The dealer contacts Mr X and concludes a deal with him. The dealer offers Rs 10 extra per share over the IPO price to Mr X.
Now, if Mr X agrees, he will have to sell all the shares to Mr Y at the IPO price + Rs 10, if he is allotted shares in the IPO. In the deal, Mr X will get a guaranteed profit of Rs 10 per share, irrespective of the listing price and Mr Y will get guaranteed ownership of the shares if Mr X is allotted the shares.
If Mr X gets an allotment, the dealer advises him to sell the shares to Mr. Y at the agreed price. On the listing day, if the shares are listed at a premium of over Rs 10 per share, Mr Y earns a profit and vice-versa.
What is GMP in IPO? (Grey Market Premium)
The grey market determines the share price of an IPO-bound company depending on the subscription data and investor sentiment. If the demand for shares is too high and the supply limited, the share quotes a premium over the allotment price.
Buyers offer an additional amount over the IPO price to get the shares before listing. In the previous example, the additional Rs 10 per share offered to Mr X over the IPO price is the Grey Market Premium. Shares of every company don’t command a premium in the grey market.
If the response to the IPO is tepid, the shares may change hands at a discount in the grey market. Investors take cues from the GMP for the listing price and to gauge the overall response to an IPO. However, GMPs may not always be an accurate indicator as the grey market is susceptible to manipulation.
Jay Chavda He is the Founder and Writer of businesspulsecare.com. He is an I.T Engineer, Freelancer, Businessman. He posts Business, Stock/Share Market, Finance Related News and updates on the website. 🔗