What is Grey Market Premium (GMP) in IPO? - Full Form, Meaning, Types and How to Trade

Grey Market Premium is an unofficial indicator used by many of the investors in the IPO market where they believe that the GMP price is the IPO listing price. In this article, let's understand the GMP, how it works, how to calculate the GMP and how GMP differs from Kostak rates.

GMP Full Form

GMP in IPO stands for Grey Market Premium, which represents the unofficial trading price of the IPO Stock before the Listing, which includes the official price plus the additional premium(positive or negative) of the stock. 

What is the Grey Market?

The grey market is an unofficial parallel market for stocks, especially in the IPO segment, where retail investors, HNIS, and others trade the shares of IPO stocks before they are listed on exchanges. In this Grey Market, all pre-IPO stocks are traded without the involvement of the exchanges. Shares are transferred from investor to investor, and no person or institution guarantees the shares and funds.

The share transfer process happens based on the trust and mutual understanding between the seller and buyer; hence, the funds transaction may happen online, and cash and shares will be credited to the demat account with the face value of the stock.

How does the Grey Market work?

Grey Market Works via buying and selling of pre-IPO/unlisted shares, where the investors purchase the shares of unlisted shares from the third party institutions, stockbrokers, angel investors, other big retail investors.

In the Grey Market, the stocks are traded at different prices based on mutual understanding between the seller and buyer, and there is no official price for the stocks that are traded before the IPO and there is no price regulations for the shares before it gets listed in the exchange.

Shares purchased in the grey market are credited directly to the demat account without the exchange's involvement. All shares are identified via the ISIN and have a predetermined face value.

Types of Trading in the Grey Market

In the Grey Market, there are mainly two types of trading that will happen on IPOs, such as:

Stocks Trading:

Stock trading involves the buying and selling of shares at a mutually agreed price at a predetermined face value of shares upon the required quantity of the buyer before the IPO hits the exchange.

Application Trading:

Application trading in the Grey Market in IPO refers to the trading of IPO Applications (BIDS). This application trading happens by purchasing the IPO application of IPOs at a premium or discount from the traders and investors based on the GMP and the Kostak rates after the opening of the IPO.

How to Trade IPO Shares in the Grey Market?​

You can trade Shares in the Grey Market by purchasing the required company shares from the seller directly. The seller might be an individual, a stockbroker, an institution or 3rd third-party shares dealer. You can trade shares by the following steps

Step 1: Finalise the stock that you want to purchase and analyse their Balance sheet, P&L Statement, Cashflow Statement and Annual Report.

Step 2: After Finalising which share you want to purchase, keep your Demat account in active status to receive shares.

Step 3: After checking the company details, fix a budget for the shares you want to purchase.

Step 4: Once you have finalised the budget, look for a trusted Seller who is willing to sell the shares and negotiate the price and quantity.

Step 5: Upon the mutual understanding between you and the seller, share your CMR copy, which consists of all your details like Demat Account Number, Pan number, Client ID and other required detailed to transfer shares.

Step 6: After submitting the details or CMR copy, the seller adds your demat details to their beneficiary to transfer the shares. 

Step 7: Now, initiate the fund transfer and ask the seller to transfer shares. Once the seller initiates the transaction, the shares will be credited to your demat account within 4-12 working hours.

Caution: There are a lot of Fraudalant activities and Scams are happening and happened in the Grey Market recently hence it was an unregulated market make you sure you are dealing with the trusted and genuine seller to safeguard your capital.

What is Grey Market Premium (GMP)​?

Grey Market premium is the price that investors are willing to pay to own a stock before the IPO. The premium may be positive and negative. A positive GMP  represents that investors are bullish on that stock by believing the stock price will go up after listing, and are ready to pay a higher price, whereas a negative GMP represents that investors are bearish on that stock by believing the stock price will go down after listing, and are ready to pay a lower price. 

In simple terms, we can say that the GMP is an unofficial indicator for IPO stocks to determine the listing price of the stock.

How to Calculate GMP?

We can calculate the Grey Market Premium of stocks very simply. Once the company announces the IPO price band, we can compare the price difference between the unofficial trading price of the stock and the official price announced by the company. The difference between the official price and the unofficial price is low. The GMP is positive if the official price is lower than the GMP; otherwise, it is considered negative.

Example

Let's consider the XYZ limited shares are trading in an unlisted market at 100₹, and it came up with an IPO to list on the exchange. Will calculate the GMP of the shares in two different cases

Positive case:

In a positive scenario, the company announces the price band for the IPO is 48-50₹ per share. Here, the price difference 

GMP = Unlisted Price - Official Price = (100-50) = 50₹

Hence the price remains 50₹ positive so the GMP of the share is 50(100% GMP)

Negative Case:

In the negative scenatio, the company announces the official price band for the IPO is 190-200  ₹ per share. Here, the price difference 

GMP = Unlisted Price - Official Price = (100-200)= - 100₹

Hence the price is negative 100₹ the GMP for the share is -100(-50% GMP)

How to Check Grey Market Premium (GMP)?

Once the company announces the IPO dates and price band, you can check the GMP on third-party websites that provide the daily GMP change based on the price change in the unlisted market. These websites will track the unlisted prices of the shares of companies that went public through IPO, and this information is not accurate; it will differ from website to website.

Difference Between GMP & Kostak

Kostak is the price that was mutually agreed upon by both the buyer and seller for trading the IPO applications. It was totally different from GMP, which shows the premium of the stock.

Conclusion

The grey market is one of the best places to secure shares in a demanding company before it gets listed, but there are no strict regulatory guidelines for this unofficial market of IPO. Stay updated on all IPOs to understand the fluctuations of the GMP and make decisions wisely, and happy investing.

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