The Grey Market refers to an unofficial market where shares are traded before they are officially listed on the stock exchange.
Yes, the shares are not traded on NSE or BSE but in a closed market with few participants who are willing to buy and sell before the shares are officially listed on the regular stock exchange.
In the Grey Market, investors and speculators trade shares without the involvement of the company or the stock exchange, without even having shares in hand.
Grey market buying and selling usually occurs during the period between the IPO closing date and the listing of the shares on the stock exchange. The Grey Market activity gives an indication of market sentiment and demand for the IPO, and can sometimes be a factor in influencing the opening price of the shares when they are officially listed.
The Grey Market Premium represents the difference between the IPO price and the market price of shares in the Grey Market.
What is Grey Market (GMP) in IPO
The Grey Market (also known as the “Hundi Market”) is an unofficial and unregulated market where shares of an IPO are traded before they are officially listed on the stock exchange.
Important Note – that the Grey Market is not a formal stock exchange or trading platform; rather, it operates through a network of dealers and brokers who facilitate the buying and selling of shares.
Difference Between Grey Market Premium and Grey Market Price
In the context of IPOs, the terms “Grey Market Premium” and “Grey Market Price” are often used interchangeably, but they have slightly different meanings.
Grey Market Premium (GMP) refers to the premium or the difference between the IPO issue price* and the price at which the shares are traded in the unofficial Grey Market.
This premium is an indication of the market’s perception of the demand and potential value of the company’s shares once they are listed on the stock exchange.
*IPO issue price = the price at which the company is offering its shares to the public during the IPO.
And here is the list of all the upcoming IPOs in 2023.
Grey Market Price, on the other hand, refers to the actual price at which shares are being bought and sold in the Grey Market. It represents the market-driven value of the shares before they are officially listed on the stock exchange.
How the Grey Market in IPOs Works
There is a five to seven days gap after the IPO issue close and before the shares are officially listed and start trading on the stock exchange, the period known as the “grey market period.”
During this time, individual persons, dealers and brokers in the Grey Market start trading the IPO shares unofficially.
Trading in the Grey Market is usually conducted through word of mouth, phone calls, or other informal means. Grey market operates outside the purview of regulators, and there is no official oversight or protection for investors.
The activity in the Grey Market can influence the listing price of the shares on the stock exchange. If there is significant positive sentiment and a high GMP in the Grey Market, it can lead to a higher opening price for the shares when they start trading on the stock exchange.
If the GMP is positive, it means the Grey Market is valuing the shares higher than the IPO issue price, indicating strong demand and positive sentiment.
Conversely, a negative GMP suggests that the Grey Market values the shares lower than the IPO price, indicating weaker demand or skepticism.
Check here the steps to invest in an IPO.
How to Calculate the GMP of an IPO With an Example
Let’s take an example “ABC Tech Ltd” that plans to go public and issue an IPO.
ABC Tech Ltd announces its plans to issue an IPO to raise capital from the public. They plan to offer 1,000,000 shares to investors at an IPO issue price of Rs. 200 per share.
Before the shares are officially listed on the stock exchange, there is a Grey Market period during which unofficial trading of ABC Tech’s shares takes place.
Persons who are sure to get allotment, dealers and brokers in the Grey Market facilitate buying and selling of these shares among investors. But unofficially. And they are not known.
Let’s assume that the Grey Market price is Rs. 350 per share.
Then the Grey Market Premium (GMP) for ABC Tech Limited would be Rs. 350 – Rs. 200 = Rs. 150 per share.
How to Calculate the GMP of an IPO
The difference between the price at which the shares are being traded in the Grey Market and the IPO issue price set by the company is your Grey Market Premium (GMP).
Here’s how you can calculate the GMP of an IPO:
Step 1: Obtain the Grey Market Price (GMP)
The Grey Market Price (GMP) is the price at which the shares of the IPO are being traded unofficially in the Grey Market.
This price is not published on any official platform and is generally available through informal channels or discussions with dealers and brokers involved in the Grey Market.
Step 2: Get the IPO Issue Price
The IPO Issue Price is the price at which the company is offering its shares to the public during the IPO.
IPO price is announced by the company and is the official price at which investors can subscribe to the IPO.
Step 3: Calculate the Grey Market Premium (GMP)
Subtract the IPO Issue Price from the Grey Market Price to find the Grey Market Premium.
GMP = Grey Market Price – IPO Issue Price
For example, “XYZ Ltd” is going public and sets an IPO Issue Price of Rs. 500 per share. However, in the Grey Market, the shares of XYZ Ltd are being traded at a price of Rs. 1150 per share.
Then, GMP = Rs. 1150 (Grey Market Price) – Rs. 500 (IPO Issue Price) = Rs. 650.
In this example, the Grey Market Premium (GMP) for the IPO of XYZ Ltd is 650 per share. This means that the Grey Market values the shares of XYZ Ltd at a premium of 650 over the IPO Issue Price of Rs. 500.
Note – Grey Market is speculative and unofficial, and the GMP can fluctuate rapidly based on market sentiment and demand.
It may not always accurately predict the future performance of the shares once they are officially listed on the stock exchange. You need to exercise caution and not solely rely on the GMP when making investment decisions.
Do Any Investment Company or Stockbroker Release GMP Information
Grey Market Premium (GMP) information is not released or published by any official regulatory agency, investment company, or stockbroker.
The Grey Market is an unofficial and unregulated market where shares of an IPO are traded before their official listing on the stock exchange. As such, the GMP is not based on any formal market data and is not subject to oversight by regulatory authorities.
The Grey Market operates through informal channels, and GMP data is typically circulated through –
- word of mouth,
- social media,
- forums, or
- discussions among dealers, brokers, and investors involved.
Do note that – the GMP can vary based on individual sources and might not always be reliable or accurate.
For official and reliable information on IPOs and stock market-related data, investors should refer to established financial news sources, stock exchanges, and regulatory agencies in their respective countries.
Stockbrokers and investment companies may provide analysis and insights on IPOs, but GMP information is not part of the official market data they typically provide.
Do Regulators (like SEBI) Support or Disapprove GMP
Securities and Exchange Board of India (SEBI) do not officially support or approve of Grey Market Premium (GMP) activities. The Grey Market operates as an unofficial and unregulated market, and it falls outside the purview of regulatory oversight.
SEBI, as the regulatory authority for the securities market in India, focuses on ensuring fair and transparent practices in the formal stock exchanges and protecting the interests of investors.
SEBI does not regulate or endorse activities in the Grey Market, as they are considered speculative and carry inherent risks.
How to Check the GMP of an Upcoming IPO
The availability and reliability of GMP data can vary, You need to exercise caution when relying on such information for investment decisions.
Here are some ways people typically check GMP for an upcoming IPO:
#1. Financial News Websites
Some financial news websites or portals may mention GMP information for popular and high-profile IPOs. However, remember that this information is often sourced from unofficial channels and may not always be accurate.
#2. Social Media and Forums
Investors and market enthusiasts may discuss GMP information on social media platforms or investment-related forums. However, keep in mind that this information might be speculative and not verified.
#3. Dealers and Brokers
In some cases, dealers and brokers involved in Grey Market activities may provide GMP information to their clients or contacts.
However, remember that this information is unofficial and should be taken with caution.
#4. Informal Networks
Some investors and traders have informal networks where they share GMP information with each other. However, since it’s not official data, accuracy cannot be guaranteed.
Grey Market Practice: Globally
The concept of a Grey Market is not unique to India and can be found in other parts of the world as well. But, the specific practices, regulations, and popularity of Grey Markets may vary from country to country.
Grey Market activities have been observed in –
#1. Grey Market in the United Kingdom
The UK has seen Grey Market activity around IPOs, although the practice is generally less common than in some other regions.
#2. Grey Market in Hong Kong
Grey Market trading is known to take place for IPOs of companies listed on the Hong Kong Stock Exchange.
#3. Grey Market in Singapore
Similar to Hong Kong, Singapore also has Grey Market activity for IPOs.
#4. Grey Market in Australia
Grey Market trading has been observed in Australia during IPOs, although it may not be as widespread as in some other countries.
#5. Grey Market in the United States
While Grey Market activities are not as prominent in the US as in some other regions, unofficial trading of IPO shares may occur in certain cases.
You need to approach the Grey Market with caution as it is an unofficial market, and the trading is speculative and carries inherent risks.
Moreover, the GMP can fluctuate rapidly based on market sentiment and demand, so it may not always accurately predict the future performance of the shares once they are listed on the stock exchange.
You should do thorough research, seek advice from financial experts, and participate in IPOs through formal channels regulated by stock exchanges and market authorities.