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What is Grey Market Premium (GMP)?

Grey Market Premium or GMP
Grey Market Premium (GMP)
Grey Market Premium (GMP)

Being an Indian, you would have surely heard about Gafaar Market, Nehru Place, Heera Panna Market, Chandini Chowk or at least CP. If you don’t know, these are the most popular grey markets for electronics, software, street food, window shopping etc. But do you know that grey markets exist even in Indian Stock Markets? Check out this complete article on the GMP of Indian stock markets.

What Is Grey Market Premium or GMP? 

When companies issue their shares for the first time to the public seeking investment, these shares are issued in the Primary Market. It is done at a pre-determined price band, fixed by the company. Investors subscribe to these issues based on their risk appetite, goal, loyalty, and affordability. Raising capital, increasing brand visibility, providing investment opportunities, and creating liquidity for shareholders are the primary goals of the company while issuing an IPO. As soon as any company gets listed in the Secondary Market after the primary market IPO listing, trading can be done in these stocks.

But when it comes to Grey Market, it is a parallel, unofficial, and informal channel in which mostly unlisted shares are bought and sold. In this marketthere are no set rules and regulations for Trading Indian Stocks. Usually, grey markets are run by a smaller set of individuals where deals are based on mutual trust. Stock Market Regulator like SEBI (Securities and Exchange Board of India) is not involved in these transactions. 

Understanding Trading in Grey Market 

Money can be earned in the grey market through two ways. Let’s understand them with the help of examples.

1. Trading IPO Shares in The Grey Market

There is a company coming up with an IPO. A couple of investors have faith and belief in that company and wish to apply for few lots each in the retail category. But they’re unsure about their allotment as it depends on the computerized allotment process. 

On the contrary, Abhishek is also completely interested in the same company. Now, because Abhishek wants sure shot allotment, he opts for unofficial trading channels or the grey market. Abhishek makes a deal with someone to buy a certain number of lots in that company’s IPO. The deal was to provide the shares at an additional cost of Rs.25/- per share over the issue price of the IPO. When one agrees to the deal due to unwillingness to take the risk of stock listing, the deal is made. 

When the dealer gets the allotment, he/she will now sell their allotted shares to Abhishek at a price of “IPO issue price+ Rs. 25/-”. This way the dealer earns a certain profit of Rs.25/ share. On the other hand, irrespective of whatever listing price, Abhishek gets shares of his favourite company and enjoys the premium if there was a listing gain.

2. Buying and Selling IPO Applications in The Grey market

Shares of the IPO are traded in the market after getting listed, right? Similarly, applications for Initial Public Offerings for various companies are also traded. Dealers offer a specific premium price regarding IPO applications which are traded in the grey market. This means that one can sell their IPO applications too.

Say, there is a company, and you are not interested in applying for an IPO of that company. But many believe that the company will list on the secondary market with stellar premium. Now, if you wish to be on the safer side, you can sell your IPO application of that company to a grey market dealer. Irrespective of the result of the allotment, you will receive your application cost from the dealer. That’s how a Grey Market works. 

What Is Kostak Rate?

Kostak, is popularly known as the price of the IPO applications. It is the cost at which IPO applications are sold in the grey market. To put it in simple words, it is the profit one makes by selling their IPO applications, before the verdict of listing or allotment. This is useful for those people who don’t want to subscribe to some IPOs but are interested in cashing out from them. Let’s understand this with the help of an example:

According to a statistical report, in the year 2021 alone, there were 1035 IPOs listed on the Indian Stock Markets. 2021 was indeed the year with the largest number of IPOs. No one would have subscribed to all the IPOs. 

Now, say among these applications one is interested only in 50 companies and not willing to take part in the rest 985 companies offer. Because of this lack of interest in subscribing to those 985 companies, one can sell their applications to a dealer in the grey market. In such circumstances, the dealer will subscribe and buy the application on your behalf. The dealer will pay the person a certain amount for every application. This profit made is termed as Kostak Rate.

How do we calculate GMP for an IPO?

The term Grey Market Premium is used to describe the premium or discount at which the shares are being traded in the grey market, prior to their listing. Let’s discuss the process of GMP calculation with an example.

Let us say that the issue price of company A is Rs.350/-. The GMP for the same company is Rs.100/-. This means that there is a very high probability of the shares getting listed for Rs. 450/- in the market. It should be noted that this Grey Market Premium varies every day depending on the supply and demand for those shares in the market as well as the sentiments and news floating around that. Hence, a rough equation would pan out to be 

Expected Listing Price = Issue Price + Expected Grey Market Premium.

Conclusion:

Since the Grey Market Premium is beyond the scope of legal authorities, it is best to stay away from it. This is because any scam might happen with you there and there is no regulator for your support. However, the premiums quoted in the Grey Market can be used as an effective indicator in considering a script’s listing performance on the secondary market.

Our blogs are made for educational purposes only, and we do not provide investment recommendations. We are not SEBI-registered advisors and do not accept cryptocurrency payments. We present publicly available facts and data, not favoring any company.

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