What is Grey Market & Grey Market Premium? | How to Invest in the Grey Market?
Do you like to book profits, then you’re at the right place to know the right tactics. Just to spill the beans we are going to discuss one new avenue for making quick profits. The article is titled “How to Invest in Grey Market”.
What is Grey Market?
A Grey market is a parallel market where individuals sell/buys IPO shares or IPO applications before getting the IPO debut officially for trading on the stock exchange. To trade in grey market stocks in India, you need to deal with brokers/dealers to facilitate the deal. However, this is possible in cash or person. As it’s an unofficial market hence trading in the grey market is not regulated by stock exchanges or SEBI.
In India, the grey market is existing for a long time. It is very commonly seen in bigger cities of India like Gujarat, Mumbai, Delhi, Jaipur, Kolkata, and Bengaluru. To understand the demand for an IPO, the grey market plays a crucial role. In case the demand for the share/application is more before the listing then grey market price tends to gain premium. On the other hand, if the demand is poor then the stock will get listed with a discount. Thus, the grey market provides an opportunity to underwriters to understand the path of the company once it gets listed on the stock exchange.
What is Grey Market Premium?
In the same context, the grey market premium is also related to this market. As the name implies, the grey market premium is the probable listing gain expected from an IPO. The grey market premium is over and above the issue price of an IPO share. Let’s take an example of a recent IPO Map my India. The company has issued these shares on a price band of Rs.1000-1033 per share. Due to high demand, the GMP was as high as Rs.700 in the grey market indicating a strong debut at Dalal Street. On the listing days, investors made a sweet return of 53% and it got listed at Rs.1581.
As the grey market is small and unofficial so it doesn’t give exact figures of listing gains you can expect from an IPO. It involves those people who have their stakes in the company. Therefore, it’s not wise to judge the performance of an IPO via Grey Market Premium instead you should look at the balance sheet of the company and the reason for raising capital by this IPO. That will decide the success or failure of a public issue.
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How to Invest in the Grey Market IPO?
Well, this is an unofficial and unregulated market hence there is no platform for trading in Grey Market. It is an over-the-counter exchange, you have to deal with local brokers or dealers to invest in the grey market over a phone call. There is no such registered body or trader to facilitate trading in Grey Market.
Usually, there are two types of Grey market trading :
- Buying or selling of IPO application at a premium before the share allotment happens.
- Buying or selling of IPO alloted shares before getting them listed on the stock exchange.
Let’s understand both scenarios with an illustration in case you wish to deal with any one of them.
In case you have applied for an IPO subscription irrespective of allotment you can sell your IPO application to a prospective buyer via a dealer. Here the dealer will find the buyer who is looking to buy an application as he believes that stock price will rise above the issue price. Then dealer executes this transaction by taking the application details from sellers.
Once allotment happens, if shares get allotted it’s up to the seller whether to sell the shares on listing day to book profits or transfer the shares to the buyer’s Demat account. But in case the seller doesn’t want to take the risk of stock market listing he can give away all the shares at the agreed price.
In case no allotment happens to the seller, then automatically the deals get canceled. However, if the seller has sold out his application then the buyer still has to pay the premium price.
To sum up, the grey market is a win-win situation for many investors to understand the demand for an IPO. Most importantly, companies get to know how they will do on a listing day.