What is gray market?
The gray market is an informal and unregulated market where shares are traded even before they are listed on the main exchanges. Unlike exchange trades that are conducted electronically, transactions in the gray market occur in person. According to ET, although these are outside the scope of trading rules, they are not considered illegal.
What is gray market premium?
Gray market premium refers to the additional price that investors are willing to pay over the IPO price in the gray market before the stock is listed on the exchange. Stocks are traded informally in the gray market based on mutual trust between traders. For example, if the issue price for an IPO is Rs 450 per share and the stock is trading at Rs 470 in the gray market, the GMP of the IPO will be Rs 20.
How is gray market premium calculated?
The calculation of GMP primarily reflects the dynamics of demand and supply of stocks in an IPO. Traders’ perception about the number of shares that can be allotted in the offering plays an important role. Arun Kejriwal, founder of Kejriwal Research and Investment Services, told ET that if the likelihood of share allotments increases, indicating more stock available for sale, then GMP will fall. Conversely, if the probability of allotment decreases, i.e. fewer shares are available, the GMP will be higher.
Prices in the gray market also move with the subscription in IPOs. Generally, higher subscription rates lead to higher GMP, and vice versa. However, abnormal responses to GMP should be taken with caution depending on the subscription.
How can you buy and sell shares in the gray market?
To buy shares in an IPO, buyers approach gray market brokers and make offers to purchase at a fixed price or premium. Brokers then contact potential sellers who applied for the IPO. If sellers are unsure about the listing price and do not want to take the risk they may choose to sell. It is important to note that there is no physical transfer of shares in the gray market. Once the shares are allotted to the seller, they are transferred to the buyers through brokers with cash settlement. All transactions are settled at the listing price, and any difference between the listing price and the first quoted price is settled on the day of listing.
Therefore, at 9:45 am on the day of listing, trading volume increases for many IPOs. However, these trades pose risks as they operate outside the supervision of both the exchanges and SEBI.
Read from ET About trading in the gray market
What does gray market premium mean?
Gray market premium indicates market sentiment for a particular IPO based on demand-supply dynamics. High GMP indicates strong demand and potential upside for the stock upon listing. Conversely, a low GMP indicates weak demand and modest or weak listings.
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How fair is the gray market premium?
Although GMP may not reflect the exact listing price, looking at GMP trends can give traders insight into the post-listing direction of a stock. Market experts say that a stock is usually listed in the range of 15-20% around its GMP price.
Can gray market premiums be manipulated?
Manipulating the gray market premium for large IPOs is challenging. However, market experts have warned that smaller IPOs may be susceptible to GMP manipulation. There has been speculation that prices for IPOs of small and medium enterprises will be controlled in the gray market. Therefore, when applying for shares in an IPO, GMP should not be the only factor to consider, says Arun Kejriwal. They suggest that GMP is 70-80% accurate, with a margin of 5% up or down in relation to the listing price.
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