How do shares trade in grey market and what's at stake
IPO) market witnessed one of the busiest periods last week with five companies, including Tata Technologies, Ireda, Flair Writing Industries and Gandhar Oil Refinery, launching their issues, there has been a lot of discussion about grey market and grey market premium (GMP). ET looks at what these terms mean:
What is the grey market?
The grey market is an unofficial and unregulated market where shares are traded even before they are listed on the main exchanges.
In this market, transactions happen in person, unlike exchange trades that see no human intervention.
Though such trades happen outside the regulatory purview, they are not considered illegal.
What is the grey market premium?
Grey market premium is the additional price that investors are willing to pay over the IPO price in the grey market before the stock lists on the exchange. The stock is traded in the grey market informally, based on mutual trust between traders.
For example, if the issue price for an IPO is ₹500 apiece and the stock is trading in the grey market at ₹520, the GMP of the IPO will be ₹20
How is the grey market premium calculated?
GMP usually reflects the demand-supply dynamics of a stock in the IPO. A lot depends on traders' perception of how many shares could be allotted in the offering.
«If the chances of allotment of shares increase, that means more stock is available for sale and GMP will fall,» said Arun Kejriwal, founder of Kejriwal Research and Investment Services.
«Conversely, if chances of allotment reduce, it means GMP will be higher as fewer shares are available.»
Prices in the grey market also move in tandem with subscriptions in the IPO. «Normally, the higher the subscription, the higher the GMP and vice versa,» said
