Colours like white, black and grey have different meanings in the stock market. Each colour represents a different market where operations take place either by following regulations or deviating from them. This piece talks about the grey market in IPO.
Thus, investors who are wondering what the grey market in IPO is can find a detailed guide on the meaning, operations and other related things. Read along!
Grey Market or Parallel market is an unofficial one where investors buy or sell IPO applications or shares even before they are issued by the company in IPO.
As Grey Market is an unofficial market, it does not abide by rules and regulations. Market regulators such as SEBI (Securities Exchange Board of India) do not monitor transactions in these fields, nor do they endorse them.
A small group of people run Grey Market Trading on the basis of mutual trust.
Grey Market Premium (GMP) is the price at which the shares of grey market IPO are being traded in the Grey Market.
Grey Market Premium shows the probable amount an IPO will take on the listing day.
For example, let’s say a company issues stock A at ₹ 200, and its Grey Market Premium is ₹ 40.
Here, it is expected that investors are willing to buy the shares of stock A for ₹ 240.
Though there is little reliability in the majority of cases, Grey Market Premium functions properly.
Grey Market primarily follows two methods. In the first medium, investors can buy or sell IPO shares in Grey Market before these get listed. On the other hand, investors can sell IPO applications at a fixed price.
Read the following sections to get a clear idea of Grey Market's working procedure.
As individuals are aware of the working procedure of Grey Market, let's move to discover the relation of Grey Market to the IPO market.
Grey Market is an unofficial arena where proper monitoring does not occur. On the other hand, there is an IPO market that follows the rules and regulations set by SEBI. Grey market and IPO market do not share any official connection.
In Grey Market, Kostak rates is a very popular term. Read the next section to get a clear idea of how it works.
Kostak rate is an amount that investors pay to the IPO application seller before the listing of the IPO.
For instance, Company B issues IPO at ₹ 100 per share. Here, the issues are anticipated to get listed in the next 15 days. There are some people who do not wish for 15 days and can buy or sell the shares unofficially in the grey market.
Let’s say an investor applied for shares of ₹ 3,00,000 in Company B's IPO and wants to sell the same since he or she is not sure of IPO allotment and listing gains. In such a scenario, that investor approaches a buyer for purchasing his/her IPO application and takes the risk.
If the buyer agrees to conduct the sale at an exit transaction of ₹ 7,000, this amount of ₹ 7,000 that sellers/investors get is the Kostak rate.
To be precise, investors who have a Demat account but do not want to subscribe to an IPO can sell the IPO application to an interested buyer in Grey Market. Here, the buyer will subscribe on behalf of the seller and against which he or she will pay a certain amount. This amount is the Kostak rate.
As stated earlier, Grey Market is over a counter market. Hence, investors cannot approach official authorities or persons for trading purposes.
Interested investors, meaning individuals who wish to buy and sell IPO shares in Grey Market, must find local dealers who will hunt buyers or sellers for them.
Now that investors know what Grey Market in IPO is, they can decide whether they want to take this route and invest accordingly.
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