IPO GMP, Gray Market Premium: Grey-market is an unofficial and unregulated market where shares are traded even before they are listed on the stock exchange…
highlights
- Before investing money in any IPO, you must have heard that the GMP of this issue is running so much or there is a huge demand in the gray market.
- What is this grey-market? Do you know who decides IPG GMP and how it works?
- Do you know how it affects investors’ decisions and why it is important to know about it before investing money in IPO?
Simply put, the grey-market is an unofficial and unregulated market where shares are traded even before they are listed on the stock exchange. Transactions in this market take place face-to-face, unlike exchange trades where no humans are involved. Although such trades fall outside the regulatory ambit, they are not considered illegal.
What is gray market premium?
Gray market premium is the extra price that investors are willing to pay in the gray market for an IPO before its listing. Stocks are traded informally in the gray market based on mutual trust between traders.
The gray market provides a way out if a person wants to exit an IPO for any reason. Investors can buy IPO shares even after missing the deadline.
A company can trade its stocks and applications in the gray market before getting listed. These markets also give the underwriters an opportunity to understand the path of the company after listing.
How is the Gray Market Premium (GMP) calculated?
GMP generally reflects the demand-supply mathematics of a stock in an IPO. A lot depends on how many shares traders expect to be allotted in the offering. The simple fact is that if the chances of allotment of shares increase, it means more stock is available for sale and the GMP will fall.
Conversely, if the chances of allotment are less, it means that the GMP will be higher as there are fewer shares available in the market.
The prices in the gray market also move along with the subscription in the IPO. Generally, the higher the subscription, the higher the GMP. The reverse is equally true.
Generally, high GMP is considered to mean good interest from investors for a share or IPO and expectation of good listing, but it does not give any guarantee. The listing price ultimately depends on the company’s business, fundamentals and market conditions.
How are shares traded in the gray market?
This trading takes place completely outside the official system, that is, neither stock exchanges are involved nor any regulatory body like SEBI monitors it. Here deals are usually done in cash and on the basis of mutual trust. The gray market becomes very active during the IPO, because some investors want to avoid the risk of listing and sell their shares in advance, while some investors are ready to pay a higher price in the hope of listing gains. For this reason, the price of shares of an IPO is decided on the basis of demand and supply in the gray market.
In the gray market, shares of a company are bought and sold informally even before the IPO. Usually a limited number of people and dealers run this market and deals are based on mutual trust. If the shares are allotted, they are later transferred to the buyer’s demat account, but if the allotment is not received, the deal is automatically cancelled.
How does the gray market work?
- Investors apply for IPO (these are likely to be sellers of shares)
- Some people believe that the stock will do well on listing (these are buyers)
- After the IPO and before the listing, select investors and traders make deals in the grey-market.
- Buyers place orders through gray market dealers at a fixed premium
- It is completely based on demand and supply.
- Investors who do not want to take risk sell their IPO shares in advance.
- Some investors are willing to pay higher prices in the hope of listing gains
- Dealer contacts share sellers
- If the shares are allotted, the deal is completed
- If allotment is not received, the deal automatically ends
There are two types of trading in the gray market – one is trading of allotted IPO shares and the other is trading of IPO applications, where the application slip itself is bought or sold at a fixed premium.
The gray market has been present in India for a long time and is especially active during big IPOs. Through this, investors get an opportunity to exit before the IPO allotment, and those who could not apply for the IPO can also buy shares informally. To some extent, this helps the underwriters (those dealing with risk in areas like loans, insurance or investments) and the market to understand how investors are feeling.
Complete information in easy language for IPO investors
- Gray market is also called parallel market.
- This is an unofficial i.e. non-government market of the stock market, where trading of shares or IPO application of a company starts even before it is listed in the stock market.
- SEBI does not monitor the deals taking place in this market.
- Stock exchanges (NSE/BSE) are not included
- Trading here is usually done in cash and on the basis of mutual trust.
What is gray market stock?
Gray market stock is where a company’s shares are offered and bid informally by traders. If a company offers its stock through traders before the shares are issued in an initial public offering or IPO, it is considered a gray market stock.
Typically, gray market stocks are run by a few people and deals are based on mutual trust. Trade in gray market stocks in India is legal and informal. But until official trading starts, the trades made cannot be settled.
What is the connection between listing price and GMP?
There is no direct connection between GMP i.e. grey-market premium and listing of shares. High GMP does not guarantee a strong listing of the share. The listing price depends on the company’s fundamentals and market conditions.
To some extent, GMP gives an idea of ​​what the IPO listing might be like.
For example-
If the issue price of a stock is Rs 100 and GMP is running at Rs 300, it means that investors are ready to buy the shares at Rs 400. This shows that the demand for IPO is quite strong.
GMP depends entirely on demand and can change rapidly.
Important things for investors
Gray Market Premium i.e. GMP definitely gives an indication, but should not be the sole basis for investment. It is important for investors to understand that the gray market and GMP are only indicative and not a guarantee of the future.
Before investing in IPO, it is more important to look at the business model, financials, valuation and market condition of the company. Gray market trends can sometimes prove to be wrong, so it should not be considered the only basis for investment.
GMP can be a valuable indicator, but it in no way guarantees a listing price. The final listing price may be determined by several factors, including the company’s performance and market conditions. As an investor, this is one of the metrics you can use to finalize your decision to participate in an IPO.
If you want to invest in an IPO in the future, then it is very important to understand the IPO GMP concept.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice in any way. ET NOW Swadesh recommends its readers and viewers to consult their financial advisors before taking any money-related decisions.
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