What is Grey Market?
Grey markets in India have long operated as a parallel market for stocks, where traders and investors assess their credibility before participating.
Let’s explore the meaning of the grey market and understand its functioning with real-life examples.
What is Grey Market and How Does it Work?
A Grey Market, also known as a parallel market, is an unofficial market for trading stocks and IPO applications.
- Investors in this market buy and sell shares before they are officially listed on the stock exchange.
- Transactions in the grey market are cash-based and occur directly between individuals without any third-party involvement.
- These trades are not regulated by SEBI or any stock exchange, making them unofficial but widely used.
- Key terms in the IPO Grey Market include Kostak (premium paid for IPO applications) and Grey Market Premium (GMP) (price at which IPO shares are traded before listing).
Real-Life Example:
When Zomato launched its IPO in 2021, its shares were trading at a ₹20-25 grey market premium before the official listing. This meant investors were willing to pay ₹20-25 more per share than the IPO issue price, indicating high demand.
Understanding Grey Market in India
The grey market operates based on demand and supply, allowing traders and retail investors to acquire shares before their official listing.
- If an investor wants to exit an IPO before its listing, the grey market provides a convenient selling option.
- Investors who missed applying for an IPO can still purchase shares through this market.
- Companies use the grey market to gauge investor interest before the stock gets listed, helping underwriters analyze potential performance.
Real-Life Example:
During Tata Technologies’ IPO in 2023, its shares were trading at a 100% premium in the grey market before the listing. Investors were willing to buy shares at double the issue price, signaling a strong debut.
What is Grey Market Stock?
A grey market stock refers to shares that are traded unofficially before an IPO gets listed.
- If a company’s shares are offered and bid upon before their IPO listing, they fall under grey market trading.
- A small group of individuals manages these transactions, relying on mutual trust between traders.
- Since trading occurs outside the official stock exchange, these deals remain unsettled until the shares get officially listed.
What is Grey Market Premium?
The Grey Market Premium (GMP) is the extra amount at which IPO shares trade in the grey market before they officially list.
- The IPO stock price in the grey market reflects investor sentiment and expected demand.
- If an IPO has a high grey market premium, it suggests that investors anticipate strong performance on listing day.
Real-Life Example:
Before LIC’s IPO in 2022, its grey market premium was fluctuating between ₹15-20 per share. However, due to market volatility, the stock did not perform as expected after listing.
Types of Trading in Grey Market
Grey market trading occurs in two primary ways:
- Trading IPO Shares: Buying or selling IPO shares before they get officially listed.
- Trading IPO Applications: Selling or purchasing an IPO application at a certain premium price.
How are IPO Shares Traded in the Grey Market?
The grey market trading process involves the following steps:
- Investors apply for IPO shares, facing the risk of receiving them below the issue price. These investors are called sellers.
- Buyers find these shares valuable and look to purchase them before official allotment.
- Buyers place their bids at a premium through grey market dealers.
- The dealer contacts sellers and offers them a price based on the grey market premium.
- Sellers who wish to avoid listing-day risks can sell their shares to the dealer at a pre-agreed price.
- Once applications are allotted, the seller transfers shares to the buyer’s Demat account if agreed upon.
- If shares are not allotted, the deal gets automatically canceled.
Real-Life Example:
Before Nykaa’s IPO listing, its shares were being traded at a premium of ₹750 per share in the grey market. This indicated strong investor interest, leading to a positive debut in the stock exchange.
FAQs
What is Grey Market?
A grey market is an unofficial market where stocks are traded before official listing or after being suspended from regular trading.
What is Grey Market Premium (GMP) in IPO?
The GMP is the price difference at which IPO shares are traded before stock exchange listing. It indicates investor demand and expected stock performance.
What factors determine IPO prices in the Grey Market?
IPO grey market prices are based on demand and supply dynamics, similar to regular stock prices.
How are IPO Applications Traded in the Grey Market?
Trading IPO applications follows the same process as IPO shares, but the seller gets the premium amount even if no shares are allotted.
Who to Contact for Grey Market Trading?
Grey market trading is not officially regulated and is typically conducted over phone calls. Interested investors must find local dealers who facilitate buyer-seller connections.
