The year 2020 brought with it a global pandemic called Corona, which has affected the people of the whole world in one way or the other, but if we look from the perspective of the stock market, then in the year 2020 and till now in the year 2021, the arrival of many IPOs in the market. Every day we read or see this news that yesterday that company’s IPO came, after so many days from today this company’s IPO is coming, this company’s IPO is launching next week, etc. If you are also interested in this type of news then you must have heard one more word and that is – Gray Market Premium
While watching the news about IPO, you must have heard that – Company X’s IPO has a Gray Market Premium of 40%.
But do you know what the gray market is or its gray market premium before the company’s IPO launch?
What is IPO Gray Market: Know about it in detail
IPO can explain the gray market as a market where traders informally trade the shares of the company. This process happens even before the company’s shares are launched through the process of IPO.
Since this is an unofficial market, there are no rules or regulations of any kind here. SEBI is also not responsible in any way for this type of trading.
Due to being an unofficial market in the gray market, there are no rules of any kind. Market monitoring institutions like SEBI etc. also do not track such transactions.
The operation of Gray Market is done by only a few people according to mutual trust.
Before any company launches IPO, it does testing through the gray market. There can be many reasons behind a company doing this like calculating IPO valuation or coming up with an idea of IPO demand.
Gray Market Premium (GMP)
Gray Market Premium is the price at which the company’s shares are traded in the gray market.
Let the issue price of stock Z be Rs 100.
If the gray market premium is Rs.200, it means that a retail investor has agreed to buy the shares of that company at Rs.300 (200+100).
Transactions take place in the same way in the gray market.
Let us understand this with another example –
Suppose the issue price of Reliance Nippon is Rs 200 and the gray market premium of Reliance Nippon is Rs 50, then GMP is positive in this given condition. Since the premium is positive, the shares of Reliance Nippon are trading at 200+50 = Rs.250.
Now if in this example the GMP of Reliance Nippon is Rs -30 and the issue price is Rs 200. Since the gray market premium is negative, the shares of investors selling Reliance Nippon shares will be trading at a discount of Rs.30 (200-30 = 170)
The point to be noted here is that GMP is very volatile and volatility remains until the trading of shares starts on the stock exchange.
Why is Gray Market Trading done?
This concept of the gray market has been going on for a long time. Its biggest advantage is that if the retail investor feels that the price of the shares of a company is going to increase in the future, then through this they can buy the shares of the company before its listing on the concept of demand and supply. This is trading.
Apart from this, its second advantage is that traders can take exit from this company even before the IPO is listed on the stock exchange.
If an investor cannot apply for IPO for any reason, then he can invest in IPO through this, or even after applying, investors who want to buy more shares can also buy shares through this Companies Gray Market. Why does the market allow trading?
The gray market goes into trading even before the company is listed on the stock exchange. Through this, the underwriters get information about the valuation of the IPO. Through this, the underwriters also get to know about the demand and supply of the company’s shares and this trading helps decide about the plans of the company.
There is a gap of 6 days between the listing of the company and the gray market, in which the underwriters start selling the shares and are eager to sell the shares in the gray market.
What is Kostak Rate?
Before the listing of shares of any company, the income that an investor makes by selling his IPO application is called Kostak Rate.
This is very beneficial for investors who do not want to take the risk of IPO allotment.
In simple language, if an investor applied for an IPO but he does not want to subscribe to that IPO, then he can sell his application to an interested buyer in the gray market. In this case, the IPO application will be subscribed by that buyer on behalf of the investor and that buyer will pay a certain amount to that investor. In this process, the profit earned by the investor is called Kostak Rate.
The value of Kostak Rate varies according to different IPO. Its advantage is that the buyer may have profit or loss in it, but the investor will get the benefit of the fixed Kostak Rate.
- IPO Gray Market Premium is very volatile and its rates can fluctuate a lot. Therefore, taking any type of investment decision based on the Gray Market IPO Rates can be risky for you.
- IPO Gray Market Rates vary from market to market. GMP rates may vary according to geography and market.
- The rate of IPO per share in the gray market is known as IPO GMP.
- The amount received by the investor by trading the IPO application in the gray market is known as Kostak Rate.
So in this way we know what gray market is and how it is beneficial for companies and investors.
Since the rules of any institution are not applicable in the gray market, but still the investor gives an undertaking that they are ready to buy even those shares which are not yet listed on the stock exchange.
As a conscious investment, you should always work based on your risk appetite.
Happy Learning !!