There has been a lot of discussion regarding the Grey Market Premium (GMP) in the share market after IPOs. From the launch of the IPO to the listing of shares, everyone’s attention is focused on the GMP. So, what is GMP and why do investors look at it before investing in an IPO? Can retail investors buy and sell shares in the grey market? Let’s find out.
The Grey Market is an informal and unregulated market where shares are traded even before they are listed in the stock market. The transactions in this market are done personally. Although these transactions are outside the jurisdiction of regulatory authorities, they are not considered illegal.
Grey Market Premium (GMP) is an additional price that investors are willing to pay in the grey market before the shares get listed in the stock market. Shares are bought and sold in the grey market based on the trust among traders. For example, if the IPO price is Rs. 500 per share and shares are being traded at Rs. 520 in the grey market, then the GMP of the IPO will be Rs. 20.
The GMP is usually based on the demand and supply of shares in the IPO. It depends on the perception of many traders on how many shares can be allotted in the IPO. If there is a higher probability of share allocation, it means more shares are available for sale, which will result in a lower GMP. Conversely, if there are fewer shares available, the GMP will be higher. Prices in the grey market also fluctuate with the subscription of the IPO. Generally, higher subscription leads to a higher GMP.
To buy and sell shares in the grey market, buyers approach grey market brokers and offer to buy shares at a certain price or premium. After that, brokers apply for the IPO. They contact potential sellers. There is no guarantee at what price the stock will be listed, and anyone who does not want to take the risk of holding it until it gets listed will sell the shares. The physical transfer of shares does not take place in the grey market. Once the seller is allotted the shares, they transfer the shares to the buyers through the broker. The transactions are done in cash. All transactions are settled at the listing price. If there is a difference between the listing price and the last quoted price, it is determined on the listing day. That is why, for many IPOs, the volume is higher at 9:45 am on the listing day. However, such transactions do not fall within the purview of exchanges and SEBI.
Grey Market Premium does not indicate the exact inventory price. However, traders can determine the direction of the stock based on the trends of GMP after listing. Shares usually fall within a range of about 15-20 percent of their GMP value.
When it comes to large IPOs, it is difficult to manipulate the grey market. However, market experts have warned that manipulation is possible, especially in the case of smaller IPOs. In recent months, there have been concerns about controlling prices in the
Gray Market: An Unofficial and Irregular Market
★Gray market refers to an unofficial and irregular market where shares are traded even if they are not listed on the stock market.
★Transactions in this market are done on a personal level, although they are outside the jurisdiction of regulatory authorities, they are not considered illegal.
Gray Market Premium: An Additional Price
★Gray market premium is an additional price that investors are willing to pay in the gray market before the shares are listed in the stock market.
★Shares are bought and sold in the gray market based on the trust between traders.
★For example, if the IPO price is Rs. 500 per share and the shares are trading at Rs. 520 in the gray market, the gray market premium would be Rs. 20.
Importance of GMP for IPO Investors
★GMP is generally based on the demand and supply of shares in an IPO. It depends on the belief of traders on how many shares can be allocated in the IPO.
★If the chances of share allocation increase, it means more shares are available for sale, resulting in a decrease in GMP.
★Conversely, if fewer shares are available, the GMP will be higher.
★Prices in the gray market also change with the subscription of the IPO. Generally, the higher the subscription, the higher the GMP.
Buying and Selling in the Gray Market
★Buyers visit gray market brokers to purchase shares in an IPO and make an offer based on the price or premium.
★The brokers then apply for the IPO. Contact potential sellers.
★There is no guarantee of at what level the stock will be listed, and anyone who does not want to take the risk of holding it until it is listed will sell the shares.
★Shares are not physically transferred in the gray market. Once the seller is allocated the shares, they transfer the shares to the buyers through the broker. The transaction is done in cash.
Gray Market Premium’s Accuracy
★GMP does not show the exact inventory value.
★Traders can indicate the direction of the stock based on the trends in GMP after listing.
★Shares generally fall within a range of approximately 15-20% of their GMP value.
Possibility of Manipulating Gray Market Premium
★It is difficult to manipulate the gray market, especially for large IPOs.
★However, market experts have warned that manipulation is possible, especially in the case of smaller IPOs.
★Recently, there have been efforts to control prices in the gray market for SME IPOs.
★Therefore, GMP should not be the sole factor to consider when applying for shares in an IPO.
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Disclaimer: This is News Coverage with Opinions of Experts and Should Not Be Taken as Direct Market Buying Tip. Market is always subject to risk. We recommend taking our content as research before investing.