What is the Grey Market Premium during purchasing of an IPO?
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Have you heard about the grey market in stock trading? If not, you will get to know everything about Grey Market Premium right here. A Grey Market, also known as a parallel market, refers to an unsanctioned stock and applications scenario. In this type of market, the stock investors get into share trading before the formal release of shares for listing in the stock exchange. The trading of stocks in the grey market in India is carried out in cash and physical conditions. No third-party firms such as Stock Exchanges or SEBI approve this kind of transaction. Kostak and Grey Market Premium are the two popular notions used in the Initial Public Offering (IPO) Grey Market.
Grey markets are usually operated run by a small group of people and all underlying transactions are carried out on the basis of mutual trust.
The scenario of grey market in India
Most grey stock markets in India work as a parallel market for stocks for quite a few years, and their genuineness is confirmed by traders and investors. Grey markets are known to instigate a demand and supply scenario, and the traders and retail investors choose to invest in the shares they are listed in the stock exchange.
If you want to exit the IPO due to any reason, the grey market provides a solution. People can also choose to buy IPO shares even after the passing of the deadline.
A firm can choose to trade its stocks and applications in the grey market before being registered in the stock market. These markets also give an opportunity for sponsors to be aware of the business path after getting registered. For example, in India, unpublished shares of domestic players like Zomato, LIC, and Paytm are described to be traded at a price that is 15X more than the estimated IPO price.
Grey Market Premium
Grey market premium refers to the about at which the transactions of the IPO shares are done in the grey market. The company’s stock that will emerge with the IPO is purchased and sold other than the stock market. The live grey market premium is considered as an indicator of how the upcoming IPO in India will respond after getting listed.
Just think that the offer price of Stock X is Rs. 100 whereas the grey market premium stands at Rs. 300. This simply refers that investors being willing to buy the shares of Stock X for Rs.400 (300+100).
The best stock broker says that the grey market premium of an IPO is dependent on the popularity and demand of the IPO slated to list.
Grey Market Trading Types
There are basically two types of trading in the grey market:
- Buying or selling of the allocated IPO shares before being listed in the stock exchanges.
- Buying or selling IPO applications at a specific rate or premium.
How the trading of IPO shares is done in the Grey Market?
The process of trading IPO shares in the grey market is given below:
- The stock investors make an application for shares via IPO. It is a risky procedure as the shares can often be allotted below the issue price. These people are hereby to as sellers.
- Some people get worth of shares more than their issue price. They get these shares before it gets registered through the IPO allotment process. These people are hereby referred to as buyers.
- When it comes to buying these IPO shares, the investors need to place the order at a fixed premium through grey market middlemen.
- These people then connect with the sellers who earlier applied for IPO and persuades them to sell their IPO stocks at a grey market premium.
- If the sellers don’t want to encounter the threat of stock market listing, they can sell the IPO shares to the grey market middlemen at a certain price.
- Once the application details are received, the intermediary notifies the buyer about the shares he has bought.
- If the shares is allotted to the seller, he can then decide whether to sell at a specific amount or send it to the buyer’s Demat account.
- The entire deal will inevitably turn null & void if no shares are allotted to the seller.
How the trading of IPO Applications is done in the Market?
According to one of the top brokers in India, the process of trading IPO applications is quite similar to that of the application of IPO shares. The major difference is that the seller is likely to get the premium price from the buyer in case if no applications have been allocated.
Overall, it can be analyzed that the grey market is largely a pointer of how the stock is likely to perform after getting listed. Although the grey market is informal, it is not lawfully downsized. A grey market IPO sometimes proves to be quite effective for many companies and investors during the launch of an IPO.