A Close Look at Grey Markets
Grey or parallel markets are spaces where shares of a company are bought and sold outside of official stock exchanges. So if unlisted companies want to test out how much demand there would be for their IPO, they usually do so in the grey market. This also gives them a good starting point to peg their IPO’s valuation. Simply put, grey markets are unregulated marketplaces to trade stocks of companies that are awaiting listing or to trade stocks of companies that are not yet qualified to go public.
Grey markets though legal are not regulated like official stock exchanges are. That’s why one would not see involvement from SEBI, stock exchanges, and brokers in transactions that take place. Think of it as an over-the-counter market where companies execute orders from preferred investors. This allows underwriters and issuers to gauge the company’s demand ahead of an IPO.
Grey markets have increased in popularity among retail investors and institutional trades, as they are able to buy valuable shares before they list and make the most of a post-listing rally. Also, getting an allotment during an IPO is just a matter of chance, so if an investor wants to invest in a company after the IPO application deadline or wants to buy more shares than what the IPO would allow, they could turn to grey markets to do the same.
Another interesting aspect of grey markets is grey market premiums. This is the amount at which IPO shares of the grey market are traded at. In other words, it is the price at which a company’s stock that will come up in an IPO is bought or sold outside the stock market. This ‘live’ grey market premium gives companies an estimate of how the IPO would fair on the day of listing For instance, let’s say the issue price of a stock is ₹ 200 and the grey market premium is ₹ 400 – this means that investors are ready to buy the shares of the company for ₹600 (₹200+₹400).
To make money in the grey market, one must either buy and sell IPO shares before the company begins trading publicly or sell the initial public offering application for a defined price
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