What is grey market and grey market premium?
A grey market is a market in which a commodity is traded through a parallel route. To put it in simple words, when the owner of a brand or a product manufacturer has not approved the distribution channel; when there is a price discrepancy between two markets for a product in demand, or there is a lack of supply of a product, a grey market for such products shapes up.
In investing, a grey market is an unofficial market for different investment products. When a stock is not actively trading in the stock market, or when new securities’ buy and sell transactions occur before the official trading begins, the trading activity that has occurred between groups of people is referred to as a grey market transaction.
What is grey market premium?
Grey Market Premium (GMP) is generally attributed to products or securities when they are not readily available to be traded in the regular/authorised market. A premium is charged for making the product or securities available to the interested buyers.
Grey markets in stock trading
Off-market trading, particularly when a market is stopped, is known as a grey market in terms of stock markets. It may also refer to trading that takes place before the formal trading of new securities.
Underwriters often utilise it to analyse the sentiments in terms of upcoming Initial Public Offering (IPO). Typically, firms that intend to go public choose to test the waters on the grey market. They do so for a variety of reasons, including determining the demand for the upcoming IPO or determining the IPO valuation.
Although this is an unauthorised market, it is not prohibited; and even though the trades are legally binding, no one can settle until official trading begins. This unregulated market was created to trade equities that were waiting to be listed on exchanges or to trade those that did not qualify for the exchanges.
Not every stock is linked to an IPO. Start-up or spin-off firms that want to test the waters before investing the time and money to become publicly traded issue some grey market stocks.
What is a grey market IPO?
IPO refers to an initial public offering when a firm decides to go public through the issue of shares. In grey markets, generally, a close group of people start placing bids and offers on the upcoming IPO. It does not fall under the purview of the Securities and Exchange Board of India (SEBI), so the transactions remain oblivious to the rules and regulations set forth by the regulator.
GMP in IPO
The grey market premium, also known as the IPO GMP, is information determined based on the demand for an IPO by a firm. After the IPO date and price band announcements, the grey market begins unofficially in the unregulated market. Before investing in an IPO, investors always look at the premium, which might fluctuate depending on market circumstances, demand, and subscription numbers.
Let us assume, Company X decides to go public and sets the date of IPO as 5th of November 2021. The grey market individuals may start placing bids and offers as per their understanding of the sentiments around the IPO. Suppose the price of the stock IPO stands at Rs. 100, and the transactions in the grey market are going on at Rs. 150. The Rs. 50 difference is the grey market premium.
Grey market, like any other stock market, has buyers and sellers. A seller is generally a person who has been allocated shares on his application and is agreeing to sell his allocated shares at a specific price (that is being traded in the grey market). A buyer is a person who has the conviction that this particular stock will move even higher after being listed.
How to invest in an IPO in the grey market?
The grey market is unofficial and unregulated, so there is no specific place to perform a grey market stock trading activity. Buyers and sellers have to identify their respective counterparts and perform the transaction.
The grey market is a parallel market; shares are purchased and sold outside the official trading channels. These markets are not regulated and there is no specific guideline governing the transactions performed here.
From a retail investor’s perspective, the grey market can play a significant role to ascertain the expected price of the upcoming IPO. As we know that the grey market is not illegal, it makes sense to keep the grey market premium under purview.