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

GMP is an unofficial indicator used by many investors in the IPO market, who believe the GMP price is the IPO listing price. In this article, let's understand what GMP is, how GMP works, how to calculate it, and how it differs from Kostak rates.

Key Highlights:

• GMP is considered an unofficial indicator for tracking IPO listing price.
• GMP fluctuated regularly and was unregulated.
• GMP will update based on the price of the share buy-and-sell transaction in the unlisted space.

GMP Full Form

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

What is the Grey Market?

The grey market is an unofficial parallel market for IPO stocks, where retail investors, HNIs, and others trade shares 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 is based on trust and mutual understanding between the seller and buyer; hence, the funds transaction may occur online, and cash and shares will be credited to the demat account at the face value of the stock.

What is Grey Market Premium (GMP)​?

Grey Market premium is the price investors are willing to pay for 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, the GMP is an unofficial indicator for IPO stocks that helps determine the listing price.

How does the Grey Market work?

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

In the Grey Market, stocks are traded at different prices based on mutual understanding between the seller and buyer, and there is no official price for the stocks traded before the IPO. There are also no price regulations for the shares before they are listed on 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 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 shares directly from the seller. The seller might be an individual, a stockbroker, an institution, or a 3rd-party shares dealer. You can trade shares by following these steps.

Step 1: Finalise the stock you want to purchase and analyse its Balance Sheet, P&L Statement, Cash Flow Statement, and Annual Report.

Step 2: After Finalising which share you want to purchase, keep your Demat account active to receive the 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 mutual understanding with the seller, share your CMR copy, which includes all your details such as Demat Account Number, PAN number, Client ID, and other required details for share transfer.

Step 6: After submitting the CMR details or a CMR copy, the seller adds your demat details as a 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 many fraudulent activities and Scams happening and having happened in the Grey Market recently, making it an unregulated market. Make sure you are dealing with a trusted and genuine seller to safeguard your capital.

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 unofficial trading price of the stock to the official price announced by the company. The difference between the official and unofficial prices is small. The GMP is positive if the official price is lower than the GMP; otherwise, it is considered harmful.

Example

Let's consider that XYZ Limited shares are trading in an unlisted market at 100₹, and it has announced 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 scenario, 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 daily GMP updates based on price movements in the unlisted market. These websites track the unlisted prices of shares of companies that went public through IPOs, but this information is not accurate; it varies from website to website.

Difference Between GMP & Kostak

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

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 IPO market. Stay updated on all IPOs to understand GMP fluctuations and make wise decisions. Happy investing.