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The term Grey Market Premium remains in trend during the time of Initial Public Offerings (IPOs) as it works as an indicator for investors to predict the listing price of a stock, the value of grey market premium of any stock depends upon the demand and supply of that stock in the grey market, share starts trading in the grey market 4-5 days prior from the IPO opening date and continues trading till IPO listing.
So, to understand the concept of what is grey market premium in IPO you need to first understand what is the grey market, we have explained everything about grey market and grey market premium in a very simple language, stay till the end so that you can take something valuable.
What is Grey Market?
There are three types of markets, let’s understand all of them:
1). White market: It is a type of market where the buying and selling of legal goods and services takes place through official/authorized channels, e.g.: buying and selling of shares through exchanges (NSE and BSE).
2). Black market: It is a type of market where illegal goods and services are bought and sold through unofficial/unauthorized channels, e.g.: buying and selling of weapons, drugs, human organs, etc.
3). Grey market: The grey market falls somewhere between the white market and the black market as it shows the characteristics of both, grey market is a legal market because goods and services traded here are legal but traded through unauthorized mediums.
There are no legal bodies like SEBI, stock exchange, etc. involved in the grey market transactions and the transactions that take place in the grey market are initiated by an unrecognized group of people called Grey market dealers, so there are no regulations for the grey market.
What is Grey Market Premium?
If any company wants to get listed on the stock exchange then it will have to first go through the process called IPO (Initial Public Offering).
The investors start trading shares and IPO applications in the grey market before they get listed in the stock exchanges, generally trading in the grey market starts 4-5 days before the IPO gets open and continues to trade till the IPO listing day.
The trade is initiated between the buyers and the sellers through mediators called dealers,
The dealers are mainly present in the cities namely Delhi, Mumbai, Jaipur, Kolkata, etc.
The extra amount of money (per share) that a seller is willing to pay to the buyer in the grey market is referred to as Grey Market Premium.
There is no regulating body for the grey market and the amount of grey market premium is decided by the dealers based on demand and supply of shares or applications in the grey market.
Trading in the grey market takes place in 2 ways:
1). Buying and selling of shares at a certain price.
2). Buying and selling of whole IPO applications at a lump sum amount.
Note: The extra amount of money/premium that a buyer pays to the seller for the whole IPO application is known as the Kostak Rate.
Let’s understand with the help of an example:
JSW Infrastructure IPO issue price range is 113-119 rupees, and the grey market premium of JSW infra per share is 19 rupees, which means that buyers are ready to pay 19 rupees extra to the sellers in the grey market, means JSW infra share is trading at rupees 119 + 19 = 138 in the grey market.
Working of Grey Market in IPO
1). Buyers and Sellers approach the dealer
- Sellers are the people who have applied for the IPO and want to sell their shares or applications at a price higher than the issue price in order to transfer their risk and book a fixed amount of profit before the listing of an IPO.
- Buyers are the people who think that the IPO will get listed at a price higher than their buying price, so they buy shares or applications at a price higher than the issue price in order to increase their probability of allotment, the difference between the buying price and the listing price becomes a profit for the buyer.
2). The dealer initiates the transaction between the buyers and the sellers.
3). In case the seller gets an allotment of shares then he has to either transfer those shares to the buyer’s D-mat account or sell them at a certain price as per the buyer’s demand, and in return the buyer will pay the seller amount at which he had bought the shares from the seller, and the deal will get settled.
But, in case the seller doesn’t get the allotment then the deal will get automatically cancelled.
Note: The whole process is based upon mutual trust and investors are self responsible for any defaults.
Advantages of Grey Market
The advantages of grey market premium are:
1). Investors can buy shares or applications even after the biddings are closed for IPO.
2). Sellers in the grey market remain on the safer side as they transfer the risk of discount issue of IPO to the buyer.
3). The Grey market premium works as an indicator that allows investors to predict the near price at which any IPO will get listed.
Disadvantages of Grey Market
The disadvantages of grey market premium are:
1). Transactions in the grey market take place in the form of cash only.
2). It is an unofficial market and the transactions that take place in the grey market are based upon mutual trust.
3). No legal actions can be taken against any party in case of default.
Conclusion
A Grey market is an informal/unofficial market where trading is done through unofficial channels, after reading this article it will be clear to you to remain away from trading in the grey market as no legal actions can be taken if any party defaults, it is okay to observe the grey market premium in IPOs but don’t place any bid in IPOs by only observing the grey market premium, use other metrics also to decide either to place a bid or not.
Don’t forget to check out the FAQs section below to get answers for your question marks.
FAQs
Q1: Why does the Grey Market exist?
A1: The Grey market exists because different people have different views, some people think that the share will get listed at a very high price but on the other hand some people are not sure about the listing price, the grey market serves as a platform which initiates transaction between these individuals, so that’s why the grey market exists.
Q2: Can I rely on the grey market premium to predict the listing price of any share?
A2: Don’t rely 100% on the Grey market premium as the grey market is an unofficial market and trading in the grey market takes place under the table. It is not necessary that a share trading at a premium in the grey market will get listed at an exact premium in the stock exchange.
Q3: What is Grey Market Premium in IPO?
A3: An extra amount of money/premium that a buyer is willing to pay to the seller in the grey market is referred to as a Grey Market Premium.
Q4: Is there any website for trading in the Grey Market?
A4: No, there is no website for trading in the grey market because the grey market is an unofficial, unauthorized, and informal market, trading in the grey market takes place through offline mode, usually on phone calls.
Q5: Where is the Grey Market located?
A5: The Grey market is an unofficial market so there is no exact location for the grey market, transactions in the grey market usually take place over the phone calls.
Q6: Can the Grey market premium of any IPO be negative?
A6: Usually the grey market premium is positive but it can be negative as well.
Q7: What does Grey Market Premium tell?
A7: The grey market premium tells about the extra price/premium that a buyer is willing to pay to the seller in the grey market, higher the amount of grey market premium higher the chance of higher listing gains.
Q8: Why do people trade in the grey market?
A8: There are three parties involved in the grey market transaction: buyers, sellers, and dealers.
- Sellers sell their shares/applications in order to book a profit before the listing in order to transfer their risk to another party (buyer).
- Buyer buys shares/applications in order to maximize their chances of allotment, so that they can earn profits because they think that share will get listed at the price higher than their buying price.
- Dealers are the mediators who initiate the transaction between the buyers and the sellers.
Q9: What factors influence the grey market premium?
A9: Demand and Supply of shares in the Grey market influences the price of the Grey market premium.
Q10: How to trade in the IPO Grey market?
A10: Grey market trading is done through unofficial channels so there is no particular place for grey market trading, but if you are interested in grey market trading then you need to find the grey market dealer who can initiate your transaction, usually the grey market transactions are carried out over the phone calls.
Q11: Why don’t grey market buyers place their applications in the primary market?
A11: They can also apply from the primary market but applying in the IPO Grey market increases their chances of allotment.
Q12: How to analyze any IPO?
A12: Always do research before investing in any IPO because investing blindly in an IPO can lead to financial losses, follow these steps to analyze any IPO.