When it comes to trading, there are several types of markets. Dealing on regulated platforms such as the NSE or BSE is referred to as white market trading. The term “black market” refers to illegal trading.
There is a grey market between these two spaces. It’s not illegal, but it’s also not that regulated.
Continue reading to learn more about the grey market in stocks, what it means to you as an investor, what GMP (grey market premium) is, the benefits and drawbacks, and much more.
What is a grey market in stock
A stock is considered a grey market stock when it is traded and bid on before its Initial public offering (IPO). This unofficial platform is also called a Parallel market and has been practised in India for ages.
The shares are booked in person and in cash. Even though the trade is affixed, it can only be settled once the company is officially listed. There is no buyer, seller, and exchange platform.
This market comprises a person and a dealer and purely runs on mutual trust. Due to its practice, this group is closely knit. Underwriters widely use this market to understand the company’s future before getting listed.
Types of Trading in Grey Market
There are two types of trading conducted:
- Trading IPO Allocated Shares before listing.
- Trading IPO Application shares at a rate.
How does it work:
The process of trading in IPO Allocated shares before the listing is as follows:
- An investor will apply for shares through an IPO. This is a financial risk, as the chances of not getting any claims or shares below its issue price are higher. Let’s call these risk takers “Sellers.”
- Then comes another party, assuming that the share will be valued over and above the price. They start collecting these shares even before they are allocated by the IPO process or listed on stock exchange platforms. These are called “Buyers.”
- Buyers reach out to grey market dealers and place the order. They buy these IPO shares at a particular premium.
- The grey market dealer will then contact the seller and ask them if they are willing to sell their IPO shares at an agreed-upon premium.
- Depending on the risk the seller wants to take, they will accept or reject the offer. If willing, they might strike a deal with the dealer and book the profit. The deal gets finalised at a precise agreed value.
- Once the application details are recorded, the seller will notify the buyer.
- If the shares are allocated to the seller, the dealer might ask them to sell them at a specific price. The dealer can also request to transfer the allotment to their Demat account.
- In the case of sales, settlement is done based on the profit or loss. And GMP at which buyers and sellers made a deal.
- If the seller loses out on the allocation, the deal gets cancelled.
The process of trading in the IPO Allocation Application at a rate or premium is as follows:
The procedure and concept of trading for IPO allocation application are the same as explained above, with one exception. The buyer, seller, and dealer function in the same manner.
In the case of a sale, the settlement is done based on the profit or loss outcome. However, if there is no allocation of application, the seller will still get the premium as per the agreed-upon arrangement.
What Is Grey Market Premium
GMP is nothing but an indicative price. The value at which the shares are dealt with in the grey market is called the grey market premium. If the GMP goes higher, there are high chances of a lofty premium. Therefore, GMP acts as an indicator for market listing gains.
Let’s understand this better with an example:
Say the issue price of share P is 150rs. The GMP of this share is 200rs. This means that the buyers are ready to purchase this share at 350 (Issues price + GMP)
In layman’s terminology, GMP is the cost at which grey market IPO shares are sold before they are listed on a regulated stock exchange platform. This premium is a demand-supply game.
The advantages and disadvantages of Grey Market
The Grey market is an exciting concept. However, one must carefully weigh the pros and cons of anything before getting into it:
- The advantage of grey market trading is that it reflects the business sentiments. The market benefits the consumer as they can purchase the same securities at a lower price.
- The geographical limitations are lifted due to no regulation involved. If a product is unavailable in a particular country due to limits in the distribution channel, they can avail it through the grey market.
- The market is highly unregulated and can lead to extreme manipulation. Therefore, there is no warranty by the dealer.
- There is no guarantee that the stock will list as per the GMP. The core of business here is indicative rather than assured.
The 2008 crisis can be a great example of the cons. Many grey market traders then had invested and shown confidence in Reliance Power, with a prediction of making huge profits.
But when the listed shares sank, many traders fell back on their promise. This triggered a colossal trust crisis in the market. The repercussions lead to an exponential decrease in trade for quite some time.
Grey market is not illegal. However, no regulations make it tricky to work with. Nevertheless, trading concepts are changing, and one might want to indulge in risk-taking every now and then. This market makes for an engaging over-the-counter platform to test with. Dealing in Grey Market has been proven helpful for many parties, and we wish you luck.
1.What is IPO grey market?
An over-the-counter platform where a company’s shares are bid on by unofficial investors. This trade takes form even before the company issues an Initial Public Offering (IPO). The market is legal yet not regulated by any complaint authority.