Introduction to the grey market
If you are at all interested in trading and keep a track of the market news then you must have surely come across the term “Grey Market”. A regular stock exchange is something that almost everyone is familiar with, but what exactly is a grey market? Grey is a term that we usually use for something that is not exactly black or white and it's somewhat the case when talking about the grey market as well. This is a place where unofficial trading takes place before they are officially launched in the regular market. Although termed unofficial, this market has been in the trading business for a long time and investors use it on a large scale. To understand what the grey market actually means and why it is so important on the trading front, let us go through the basics of this term and understand its functions a little better.
What is Grey Market?
Grey market basically is an unofficial market where financial securities are traded. This market is also called a parallel market where investors trade for shares or applications before the shares are launched for trading in the official market. Another scenario in which grey market trading takes place, is when a stock has been suspended from the market shares. Grey market lets the issuer and underwrites gauge demand for a new offering because it is known as a “when issued” market which means it trades the securities that will be granted in the near future.
In India, trading in the grey market has been taking place for a long time through which the investors and traders check the authenticity of the stocks. This trading is done in cash and in person as it is an unofficial way of trading. A demand and supply situation is played by the grey markets in which the investors and traders buy trades before they get listed. The grey market transactions are not backed by third party firms such as stock exchanges or SEBI.
Grey market offers an easy way for individuals who want to exit the Initial Public Offering or IPO. Through the grey market, individuals can buy the Initial Public Offering shares or IPO shares even after missing the deadline. Grey market is also used by companies to trade their stocks and applications before getting listed. It is also a great place for underwriters to understand the path of the company after getting listed.
Another context in which the term grey market is used is when relating it to import of goods and sales by an unauthorised dealer. This activity is considered to be equally unofficial as the grey market trading.
Understanding the Grey Market
When trading in a grey market, one of the important things to know is that while the trade in this market is binding, there is no way that it will be resolved before the official trading begins. This puts the trade at a risk of an improper party and increases the overall risk in trading. Given this risk, many institutions like mutual funds, pension funds and even some investors may refrain from trading in the grey market.
When talking about the grey market for goods, it is important to know that this market rises when there are discrepancies in prices of popular products in different countries. Popular consumer devices and electronics have a large grey matter in many countries as these products can be easily bought online and shipped across various countries. Other than these products, other products like luxury cars, shoes, branded clothes, pharmaceuticals, cosmetics and many more are popular in the grey market of various countries. The grey market for goods is a place for unauthorised dealers to import such popular products in bulk and then sell them at prices that are way lower than the local market prices.
Before purchasing such products, customers should be careful and ensure that the products they buy meet the local safety standards and certification standards. Such products also don’t get post sale service and support as authorised dealers are not willing to service the goods in the grey market.
Grey Market in Stock
Grey market in stock is the one where the company’s shares are traded and bid by the traders unofficially. Any time if a company presents the stocks before the shares are issued in the Initial Public Offering or IPO, then it is considered to be a grey market stock. The deals made in the grey market are based on the mutual trust of the individuals as the grey market stock is usually run by a small set of individuals.
In India, trading in the grey market stocks is a legal and unofficial way of trading. All the trades carried out through the grey market can be only settled after the official trades commence.
Grey Market Premium
Grey market premium is the amount at which the Initial Public Offering Shares or IPO shares are traded in the grey market. Live grey market premium reflects how the IPO will react on the listing day. When a company’s stock comes up with the IPO, it is bought and sold outside the stock market. Trading IPO shares in the grey market comes with a complete financial risk as sometimes these shares may be allocated below the issued price.
When buying the IPO shares from the grey market, the buyers need to place an order at a certain premium amount. The dealer contacts the sellers and asks them to sell the IPO shares at the grey market premium. The sellers who don’t want to face the risk of stock market listing sell their IPO shares to the grey market at a fixed price.
Although Grey market has been widely used by investors, traders and companies and there are a few grey markets where large amounts of trading takes place, there are a few factors which need to be considered before stepping into the grey market. These factors include the facts that grey market trading can destroy the reputation of the listed entities and this trading can also prove to be risky.
