Introduction to Grey Market Premium
Grey Market refers to the unofficial channel of distribution that lies in parallel to the existing stock market where investors use this as a medium to seek official goods/stocks. Take e-commerce for example. As a buyer, you have the option to either purchase from the brand’s official store itself, or even from the brick and mortar store, or you may choose to purchase elsewhere, in other official distribution channels or unofficial ones like local vendors and retail shops.
Understanding Grey Market Premium
Grey markets exist mostly for IPOs of companies, many times even before the IPO for the company opens. Grey markets are unregulated and the SEBI does not endorse them; this market is handled usually by a small number of individuals, and the dealings are based on mutual trust. IPO grey market premium (IPO GMP) is simply the price at which the stock is trading outside of the stock market. Say an investor wants to purchase a stock of a newly listed company before its IPO launch. One investor has been allotted a number of shares and they are happy with the amount paid to avail those shares. Another segment of investors (buyers) may assume that the issue price of the stock needs to be higher. Therefore they seek to set a GMP on a fixed date, on and after the launch of an IPO, make it the price at which they have bought the share from the sellers to make profit from people who want the shares at the GMP price (other investors).
Highlights of Grey Market Premium
The purpose of GMP is to act as an indicator of how the stock market, the stock issue and the prices of the shares interact with the investors on the listing day. The estimation of the premium added to the official issue price will help grey market investors purchase the stock at a lower value and sell it at the GMP price. Kostak rates are the rates in a grey market that determine what percentage you as a buyer will be paying to the seller who is selling you the IPO application. It is a secure way of fixing the profit, although it is very unreliable.
