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Introduction to Grey Market Premium
Grey market premium in IPO is a phenomenon that occurs when an investment bank fails to price its initial public offering (IPO) correctly, allowing the first wave of retail investors to buy shares at a higher price than they would have if the investment bank priced the IPO correctly.
What is IPO GMP? How is it calculated?
Grey market premium in IPO in the stock market is the difference between the price at which a new issue of securities or commodities is initially offered to the public and the same security's price on a stock exchange or other freely accessible trading venue.
By definition, when an IPO is sold in its primary market, it is sold at a fixed price. However, when it comes to listing on the stock exchange, it can be traded at a different price, known as the grey-market premium.
The grey market premium for a particular IPO can be calculated as:
GMPR = GMP * Q
Where GMP is Grey Market Premium and Q is the number of shares sold in the primary market.
Grey Market Premium- Understanding the Basics
The grey market typically arises when an investment bank underprices the IPO by below the prevailing market price or when it does not price the IPO on IPO watch high enough to make it fully subscribed.
Investment banks are said to be wary of grey market transactions since they can result in losses.
For investors who believe that an offer undervalues a company's stock, grey market trading opens up an opportunity to purchase shares in the company at a lower price than they would have before the offer was made. This is particularly true when demand for the share is high, but the terms of the offer restrict supply.
The grey market premium can be as high as 40% on a few occasions by some brokerages. The NSE has taken measures to curb this practice through a new policy called "Price Band". However, many brokerages have found a way around this by issuing another IPO through Demat, which usually gets better GMP.
A Grey market is a trading in which non-broker dealers sell shares of an initial public offering (IPO) before the official trading date. This practise is illegal in some countries and legal in others. It is also called pre-market trading or unofficial market, and in India and America, it is known as the direct market.
What does IPO GMP mean in the stock market in India?
A grey market in an initial public offering in India means that the broker-dealer sells the shares to the buyer at a higher price than the price fixed by SEBI.
The primary purpose of grey market premiums is to get early access to the hottest new issues before they are available to average investors.
The buyers get into these hot issues at pre-fixed prices, while the seller earns a profit by taking advantage of the demand for these stocks among buyers who would otherwise have to buy after the official listing at a higher price.
Grey market trading has been expected since FPOs were introduced, although it may be prohibited or restricted for some IPOs. The grey market trading allows investors to get early access to shares of hot companies, which they are likely to appreciate.
The grey market premium may be considered as one of the essential factors while deciding whether an IPO will give good returns or not.
What are the parameters for IPO GMP in the stock market?
The grey market premium is the difference between the initial public offering price and the price that confident institutional investors are willing to pay for the IPO.
This type of trading happens when investors buy new shares released by companies to select private clients. The demand for these shares is much higher among retail investors who are willing to pay a premium for getting in early. This creates an excellent opportunity for value investors to invest in the IPO listing before being publicly released.
The grey market premium is usually more significant in link in time IPO with a high demand for shares. This can be because of an exciting business model, unique assets, or good management.
The grey market premium is usually smaller in IPOs with little or no demand. This can be because no tangible assets are backing the company or have a bad reputation in the market.
Grey market premium- A Special Case of Arbitrage
The grey market helps ensure that there is enough demand for the IPO if it does not get sufficient response in the stock exchange. This way, companies can avoid releasing their shares at a discounted price or even cancelling their public offering.
The latest IPO and the current IPO for the grey market premium is also affected by the overall strength of the economy. Since IPOs are dependent on investor confidence, companies that go public during a time of economic prosperity will have a higher chance of success than those that launch during an economic downturn. The grey market premium can be damaging if there is a low demand for shares in an IPO.
Grey market premium is the price at which investors are willing to buy or sell securities that are not traded on any exchange. It is also known as an off-market premium. The grey market for stocks is different from the grey market for bonds, currencies, commodities, art, collectables and antiques.
The grey market premium phenomenon-GMP
The primary advantage of the Indian stock market over its counterparts in other countries is that it allows unlisted companies to be traded by anyone interested in buying them. This provides an opportunity to those who want to invest in a company's stocks but do not have the time and expertise to decide whether they should invest in it or not.
A company comes out with its new IPO (initial public offering) when it lists its shares on a stock exchange. After the IPO is added to the upcoming IPO and makes it to the upcoming IPO list, the shares of those companies trade on the exchange itself and can be bought or sold by individuals and institutions such as mutual funds and pension funds.
Listed stocks carry a premium over their corresponding unlisted counterparts –Grey Market Premium – because they are liquid and can be easily bought and sold without hassle. In contrast, unlisted stocks can't be traded quickly and carry a higher risk than listed ones.
Investors buy on the first day of listing to make a quick buck by capturing this premium. As we all know, on the first day of listing, the company sees a lot of volatility and faces oscillation in stock price for that particular counter. This oscillation or volatility provides ample opportunity for investors who had accumulated that counter before the listing to book profits.
Nobody needs to time the market, but everyone needs to time their investment.