There is a lot of mention of Gray Market Premium i.e. GMP in the stock market, let us know what it is. (symbolic photo)
highlights
- Know what is Gray Market Premium (GMP)?
- How are IPOs traded in the gray market before listing?
- Does Gray Market Premium (GMP) give an accurate estimate of IPO listing?
What is the gray market and how does it work?
The gray market, also known as the parallel market, is an unofficial stock and application market. In this market, investors trade for shares or applications when the shares are not officially listed for trading on a stock exchange. No third-party firm, such as a stock exchange or SEBI, supports this transaction. Gray market premium is a familiar term in Initial Public Offering (IPO).
Read full article
Use of GMP for IPO
If someone wants to invest in an IPO in the coming time, then it is very important to understand the IPO GMP concept. GMP stands for Gray Market Premium, which is the extra amount that investors are willing to pay for any IPO in the unofficial or gray market, i.e. before the share is officially listed on the stock exchange. Thus, the GMP of an IPO can help predict how much investors expect share prices to rise when the shares are officially listed.
Investors anticipate the potential rise in price of an IPO upon listing, and are willing to pay more than the issue price (set by the company), which is the premium. Investors can use GMP as an indicator of investor interest and an estimate of the listing price. A higher GMP indicates a good listing price and strong interest among investors, while a lower GMP indicates less demand.
Understand how GMP works?
If the IPO price of a company is Rs 200 and investors want to pay Rs 60 more as GMP (Grey Market Premium). Therefore, he expects the stock to list at Rs 260 or even higher. This will be an important factor that investors will keep in mind before deciding whether to participate in the IPO or not. However, it is also worth noting that while GMP may be a valuable indicator, it does not in any way guarantee a listing price. The final listing price may depend on many factors, including the company’s performance and overall market conditions. As an investor, this is one of the many metrics you can use to finalize your decision to participate in an IPO.
Who are IPO gray market dealers?
Gray market transactions are carried out by private equity brokers or dealers, who act as middlemen between buyers and sellers. These dealers are not registered with any financial authority and rely entirely on trust to conduct transactions.
How does trading take place in the gray market?
Trading in the gray market begins as soon as the IPO price is announced, and continues until the shares are listed on the stock exchange. It works like this:
Transaction over phone: Trading takes place through live communication, usually over phone calls.
No official tracking: Because the gray market operates outside the stock exchange, there is no official record of transactions or prices.
Limited Participant: Gray market trading is generally dominated by high net worth individuals (HNIs) and experienced traders rather than retail investors.
Price fluctuations: GMP can change daily depending on demand and overall market conditions.
Gray market is based on demand and supply
Gray markets work on demand and supply conditions, and traders and retail investors buy shares even before they are listed. If a person wants to exit an IPO for any reason, the gray market offers a way out. People can buy IPO shares even after missing the deadline.
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.
end of article
