IPO stands for Initial Public Offerings Grey Market Premium. It is an insight into the unofficial market where shares of an upcoming IPO are traded before their official listing on a stock exchange. To understand the complete scenario, you need to understand them separately. Let’s first start with IPO, which stands for Initial Public Offerings is one method companies can use to go public for the first time. Growing companies that need capital will often use IPOs to raise money. When a private company decides to go public, it can apply to be listed on a stock exchange, marking the official change from private to public ownership. By going public, a private company or business can sell their shares (equity) to the market. Any private company/business can choose to go public (given certain conditions). Let’s take an example: An inventive startup might choose to go public by listing on an exchange. However, an existing company may be able to expand its operations, pay off debt, and raise capital by going public. You may wonder why a privately held corporation would wish to go public and share ownership with the general public. A private company’s decision to go public marks the beginning of a new business. An organisation’s whole management structure is altered when it transfers from private to public ownership. As a retail investor, IPOs present both opportunities and risks for you.
Whereas IPO grey market is an unofficial and unregulated marketplace where securities are traded before they are officially listed on a stock exchange. The government knows about the Grey market but they do not authorise them. When a company wants to go public, they first introduce it to the grey market through Initial Public Offerings (IPOs). Here, people trade the IPO before it is introduced on the official stock exchange.
Regulation and Legality: In the grey market, transactions operate outside the regulatory bodies. There is a lack of scrutiny or transparency, which enables less protection for the investor to trade here.
Trading Mechanisms: In the grey market, trading is done over-the-counter (OTC), meaning transactions are done directly between buyers and sellers without a centralised exchange. Investors can bid on the stock. There is no transparency of price in the grey market.
Pricing and Volatility: Grey market prices, often referred to as the Grey Market Premium (GMP), are highly volatile. The price of stock in the grey market is not fixed. GMP reflects the market’s perception of an IPO’s potential success or failure before the official listing.
Transparency and Information: In the grey market, there is a lack of detailed transparency. Information is often asymmetric.
It is crucial to remember that the grey market is unregulated, which puts buyers and sellers in danger. In addition to potential authenticity or quality issues, products sold on the grey market might not come with manufacturer warranties or protections.
Now, what is Grey Market IPO? It is a market where people buy or sell IPO shares before their release in stock exchanges. You can find the various types of companies in the IPO shares, remember it is the unofficial market. There are no rules and regulations for purchasing and selling goods or shares here. There is no authority like the Securities and Exchange Board of India (SEBI), National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are involved and responsible for your purchase and sale of IPO shares.
Here’s the table summarizing the latest IPO analysis and estimated IPO grey market rates for forthcoming IPOs with potential listing gains:
IPO Name
Date
Type
IPO GMP
IPO Price
Gain
Kostak
Subject
Diffusion Engineers
26-30 Sept
Mainline
₹55
₹168
33%
₹3,500
₹3,500
Garuda Construction
8-10 Oct
Mainline
₹-
₹95
-%
₹–
₹–
NTPC Green
Soon
Mainline
₹35
₹-
-%
₹1,000
₹6,500
Hyundai Motor India
14-16 Oct
Mainline
₹370
₹-
-%
₹–
₹2,500
Waaree Energies
Soon
Mainline
₹-
₹-
-%
₹–
₹–
Divyadhan Recycling
26-30 Sept
NSE SME
₹-
₹64
-%
₹-
₹-
Sahasra Electronics
26-30 Sept
NSE SME
₹160
₹283
57%
₹-
₹50,000
Forge Auto
26-30 Sept
NSE SME
₹15
₹108
14%
₹-
₹15,000
Nexxus Petro
26-30 Sept
BSE SME
₹-
₹105
-%
₹-
₹-
HVAX Technologies
27-1 Oct
NSE SME
₹15
₹458
3%
₹-
₹-
Saj Hotels
27-1 Oct
NSE SME
₹-
₹65
-%
₹-
₹-
Paramount Dye Tec
30-3 Oct
NSE SME
₹5
₹117
4%
₹-
₹5,000
Subam Papers
30-3 Oct
BSE SME
₹25
₹152
16%
₹-
₹15,000
NeoPolitan Pizza
30-4 Oct
BSE SME
₹-
₹20
-%
₹-
₹-
Khyati Global Ventures
4-8 Oct
BSE SME
₹-
₹99
-%
₹-
₹-
Shiv Texchem
8-10 Oct
BSE SME
₹-
₹166
-%
₹-
₹-
What is Grey Market Premium IPO?
Grey Market Premium is a price at which a stock is traded on the grey market. Grey market premium IPO is the price of IPO shares in the grey market. The price and amount are totally based on the market sentiments. Grey Market Premium is high when supply is limited and demand is high. In contrast, the Grey Market Premium is low when supply is high and demand is low. Let’s take an example: Suppose the issue price of stock X is $100 and the GMP is $200. This indicates that traders are prepared to pay $300 ($100 + $200) for stock X. Now, whether or not the stock is listed on the GMP price will determine profits and losses. If the closing price of the stock on the first day of trading is higher than the price paid before the IPO, the trader will make a profit. If the price after the IPO is low, the trader will make a loss.
How the Grey Market Differs from Official Markets like Stock Exchanges?
The IPO Grey market and the official stock exchange are two different options. They differ in the financial ecosystem, each with unique characteristics, mechanisms, and implications for investors.
Official Stock Exchange: Stock exchanges are regulated platforms where securities like stocks, bonds, and derivatives are bought and sold. Some examples of official stock exchanges like NIFTY, New York Stock Exchange (NYSE), NASDAQ, Bombay Stock Exchange (BSE), etc. These official platforms run under the strict regulations set by governmental and financial authorities such as the Securities and Exchange Commission (SEC) in the United States or the Securities and Exchange Board of India (SEBI). They are official in the government’s eyes and more trustworthy.
Regulation and Legality: Transactions done in the stock exchange are highly secure and ensure transparency, fairness, and investor protection. They follow all the financial laws and maintain investor confidence.
Trading Mechanisms: In the official stock exchange, trading is done through electronic trading systems. It is based on real-time transactions and price discovery. Investors can buy and sell easily with liquidity and transparency in pricing.
Pricing and Volatility: In the stock exchange, the price of a stock is determined by the supply and demand. Even the price of any stock is officially announced to the public through market news or investor sentiment.
Transparency and Information: In the stock exchange, transparency is the cornerstone. Companies who release stock provide all the details like financial health, operations, and material events. This information is available to all investors equally.
Do not get confused in both. As we know, the grey market is unofficial. It is not controlled by third parties or authorities. In addition, there is not a formal platform and all transactions take place among a small number of individuals. Mutual trust is the foundation of all agreements in the grey market. However, the grey market is completely legal. It is not like the black market, which is considered illegal.
Precaution Before Entering Gray Market
Associated Risks: Since the grey market is unregulated, investors should be aware of additional risks. There may be problems with warranties, customer service, legitimacy, and quality. Before investing, it is crucial to thoroughly investigate and assess the credibility and reliability of grey market vendors.
Legitimacy and legality: Some goods that are sold on the grey market, like illegal copies, counterfeit goods, and parallel imports that infringe on intellectual property rights, may be subject to legal limitations. Investors must adhere to all relevant laws and regulations while making purchases on the grey market.
Value and costs: Because of restricted product availability and projected demand, grey market prices are usually higher. Investors should assess whether the product’s genuine value can be justified by its grey market pricing and decide if they are willing to pay more to have early access to the goods.
Warranties & Support: Support and guarantees from the manufacturer may not apply to goods acquired on the grey market. Investors should be aware that they can have trouble getting repairs, replacements, or refunds in the event of issues or flaws.
Availability in the conventional market: Products that are first offered for sale on the grey market will frequently subsequently become available through official channels on the official market. Investors should think about whether it would be safer and more convenient to wait or to use official methods
Listed IPO Grey Market Premium of IPO 2023 | 2024:
As grey market for Initial Public Offerings (IPOs) is handled outside the stock exchange. here is the step on how IPO GM works-
Pre-IPO Announcement: The process begins when the company decides to go public and announce their shares through IPO. While announcing their IP, they have to provide details like the number of shares they want to issue, the issue price and a subscription period.
Grey Market Formation: With time, when the news of the IPO Company spread, the grey market started to build. Every day, new traders and investors start showing interest in the IPO. They show interest in selling and buying the IPO shares through the great market or unofficial market.
Grey Market Premium: Over time, The Grey Market Premium develops. It is calculated as the difference between the grey market price of the IPO shares and the official issue price. If there is a positive response it means it is premium and if there is a negative, it means discount.
Broker Participation: In the grey market, brokers and intermediaries play an important role. They are the ones who connect the buyers and sellers of IPO shares in the grey market. Many investors show their interest in the particular IPO share through the brokers only and do not reveal their profile.
Informal Trading: As we know grey market is informal trading. It is operated informally by word of mouth, online forums and communication channels. Investors/brokers exchange information about IPO shares and their GMP through informal channels only.
GMP Discovery: The GMP price or amount of IPO shares is decided by the supply and demand. The price is influenced by the market sentiment, company valuation and economic condition.
Risk Assessment: The complete process under the grey market is risk-associated. Since it is an unofficial and unregulated market. Investors and traders should be aware of potential risks like fluctuations in GMP and legal protection of money.
Subscription Period: There is an official subscription period on IPO shares by the company. The investor can apply to IPO shares only in the subscription period. The number of shares in the market depends on the demand. Investors need to get their desired quantity. Hence, it is good to check the number of shares as per subscription period.
Allotment & Listing: Once the subscription period ends, the company and underwriters can decide the final allotment of the shares. Later the shares will be officially listed on the stock exchange and trading begins for it publicly.
Post-Listing Price Movement: The actual listing price in the stock exchange of shares may and may not align with the grey market price. It is now official and can vary. Post-listing price of shares will be influenced by the market force, demand on the stock exchange as well as company performance and valuation.
Impact on Grey Market: The official listing of shares can impact the grey market. If the price of shares is different from the grey market, then it will be adjusted in the GMP. Traders will also react as per the actual market price or value.
Monitoring & Analysis: Investors and market participants monitor the grey market and GMP carefully. News, Market trends, etc influence the grey market price.
Investor Caution: It is needed to caution against the grey market by the investors. While GMP provides insights into market sentiment, it is not a guaranteed indicator of post-listing performance, and decisions should be based on comprehensive analysis.
Post-Listing Trading: As said, after being listed in the official stock exchange. Traders can start trading. Investors can buy and sell the shares through the brokerage accounts. The price of shares varies with demand and supply.
Long-Term Consideration: Investors should consider the long-term prospect of the company and its shares. They should not stick to the initial listing price. e grey market and GMP provide a snapshot, but long-term investment decisions require a broader analysis of the company’s fundamentals.
Regulatory Development: Regulatory bodies and authorities monitor the grey market activities and change the regulations as per their function. Investors should stay informed about every regulatory development done by grey market trading.
Why do business owners aim for an IPO? When companies try to achieve their dreams, objectives, and vision through corporate activities, they occasionally require large amounts of capital, and other things like credibility and brand awareness. To grow their company, they also require top-notch human resources. Although it sounds simple, there are several challenges involved in actually cooking these things. Furthermore, it would be impossible for an unlisted company to prepare all of these at once.
However, if an IPO becomes a reality, it may be possible to prepare and prepare all of these at once. On the stock market, stocks can be freely purchased and sold, making it feasible to raise money from a variety of regular investors. Furthermore, having a listed company—which makes up less than 0.1% of all companies increases credibility and name recognition, which facilitates the recruitment of top talent. Because of this, entrepreneurs use initial public offerings (IPOs) as a key managerial tool to help them achieve their dreams and goals.
Benefits of Initial Public Offering:-
What particular advantages may an IPO offer? Let’s check from four perspectives: company, employee, shareholder, and founder.
Advantages for the company:-
Enhancing funding capacity and expanding the range of financing options (allowing for direct financing advantages)
Improving creditworthiness and brand recognition (getting new business partners, making financial institutions more reliable, etc.)
Benefits for preserving human resources and raising staff morale.
Encouraging individual management to reinforce the internal management system
Advantages for workers:-
Better incentive (status of working for a listed firm)
Asset formation through stock options and employee stock ownership schemes, etc.
Advantage for shareholders:-
The expansion of stock circulation will facilitate the buying and selling of stocks, allowing for the recovery of invested capital through stock sales.
Fair price formation will enhance the asset value of stocks.
Advantage for Founders:-
Achieving founder profits
Disadvantages of Initial Public Offering:-
If you achieve an IPO, you will be able to enjoy the above-mentioned benefits continuously, but at the same time you will have responsibilities (disadvantages) that you must fulfil.
The requirement to create a system for the timely disclosure of securities reports, quarterly reports, etc.
Handling stock transactions, such as hostile takeovers (without consent).
Measures against stockholders, such as activist activity and the seamless conduct of shareholder assemblies
Incurrence of listing maintenance costs
Managers who view the IPO as the end objective and are just interested in the founders’ profits will find it difficult to carry out these duties, which will become very burdensome for them after the IPO.
How To Calculate GMP Of IPO Share?
GMP is Grey Market Premium, which is a crucial step for the both investor and the IPO company. It is a difference between the grey market price of an IPO share and its issue price.
Grey Market Premium(GMP): The price of the IPO shares in the grey market, during trading there.
Issue Price: The price which is issued by the IPO company during the announcement.
To calculate the GMP, gather two essential pieces of the above information about the company. This information can be found in financial news or online forums. Once you have these values, you need to use a simple GMP formula:
GMP = (Grey Market Price) – (Issue Price).
Note the result and interpret it as follows-
Positive GMP: If the result is positive, it means the grey market price is higher than the issue price suggesting strong demand and market optimism.
Negative GMP: If the result is negative, which means the grey market price is lower than the issue price, a sign of potential concerns or lower demand.
Zero GMP: If the result is zero, which means the grey market price and the issue price are equal.
Your work is done here. Keep track of any changes in the grey in the grey market price. If there are any changes, Adjust the GMP calculation. The value of GMP varies with the market news, market dynamics, investors, etc. You should be very cautious while approaching the information. The grey market is speculative, and actual post-listing performance may differ.
How To Buy And Sell IPO Shares In The Grey Market?
Buying and selling of IPO shares in the grey market is unofficial. Let’s understand the process of buying and selling IPO shares in the grey market-
To buy the IPO share in the grey market, you have to connect with unofficial channels like local brokers, informal networks or online forums. You can buy as many shares at the quoted price or premium, which is known as GMP. Selling IPO shares in the grey market follows the same process. To sell the secured IPO shares in the market you need to contact a broker. Brokers will find the potential sellers. IPO shareholders sell the shares because they are not about the GMP and cannot take the risk of holding the shares and releasing them for selling again. Remember, all the transactions in the grey market are done by cash only. In addition, there is no official contract between the parties.
Let’s take an example to understand better-
Let’s assume XYZ company’s issue price is Rs 500 in the grey market and it trades at a premium of Rs 100. Now buyers make an offer to buy 20 shares at Rs 600 which are worth Rs 12,500. Now the seller has made an offer for Rs 500*20 shares worth Rs 10,000.
Now, assume the share was listed at Rs 700. Let’s calculate the buyer and seller’s profit and loss-
FAQ (Frequently Asked Question) On IPO Grey Market:-
Q.1 How much GMP is good for an IPO?
The position of Grey Market Premium (GMP) is favourable for IPO. It indicates the string of strong investor interest and confidence.
Q.2 What is GMP in grey market?
Grey Market Premium (GMP) is the financial term for the upcoming IPO in the unofficial and unregulated grey market. It is the difference between the grey market price of an IPO share and its issue price. The positive Grey Market Premium(GMP) is a sign of strong demand.
Q.3 How accurate is GMP IPO?
There is no guarantee about the GMp Accuracy. But in most cases, GMP is correct.
Q.4 How is GMP decided in IPO?
The Grey market Premium is based on the demand and supply shares.
Q.5 What is kostak?
Kostak is the price of an application. It is a premium amount of IPO application, in which you can trade in the grey market.
Q.6 Is the grey market legal?
The grey market is an unofficial platform, but it is not illegal like the black market.
Q.7 What factors influence Grey Market Premium (GMP)? – Grey Market Premium is influenced by factors such as market sentiment, demand-supply dynamics, company valuation, and economic conditions.
Q.8 Is Grey Market Premium (GMP) a reliable indicator of IPO success? – While GMP provides insights into market sentiment, it’s not a guaranteed indicator of post-listing performance. Investors should conduct comprehensive analysis.
Q.9 Can investors participate in IPO grey market trading without a broker? – No, investors typically engage in IPO grey market trading through brokers or informal networks.
Q.10 Are there any legal consequences for participating in IPO grey market trading? – Grey market trading is unofficial and unregulated, but it’s not illegal. However, investors should be cautious about potential risks.
Q.11 How do IPO companies view grey market activity? – IPO companies may monitor grey market activity but do not officially endorse or participate in it.
Q.12 What precautions should investors take before engaging in grey market trading? – Investors should research thoroughly, assess risks, and ensure compliance with relevant laws and regulations.
Q.13 Is there any correlation between Grey Market Premium (GMP) and post-listing performance? – While there may be some correlation, post-listing performance can be influenced by various factors beyond GMP.
Q.14 What role do underwriters play in IPO grey market trading? – Underwriters facilitate the IPO process but may not directly participate in grey market trading.
Q.15 Can IPO grey market trading impact the official listing process? – Grey market trading doesn’t directly impact the official listing process but may reflect market sentiment.
Q.16 Are there any restrictions on the volume of IPO shares one can trade in the grey market? – There are no official restrictions, but trading volume depends on demand and supply dynamics.
Q.17 How do market sentiments affect Grey Market Premium (GMP)? – Positive market sentiments often lead to higher GMP, while negative sentiments may result in lower or negative GMP.
Q.18 What happens if the official IPO listing price differs significantly from the grey market price? – Discrepancies between grey market price and official listing price may lead to adjustments in GMP and market reactions.
Q.19 Are there any risks associated with holding IPO shares acquired from the grey market? – Yes, risks include potential fluctuations in GMP, lack of legal protections, and uncertainties about post-listing performance.
Q.20 How do regulatory developments affect IPO grey market trading? – Regulatory changes may impact grey market operations, and investors should stay informed about relevant developments.
