What is GMP in IPO?

When an inexperienced person first begins investing in IPOs, He starts hearing words like Grey Market, GMP, and Kostak. It surely comes to mind that what is GMP in IPO?  These could puzzle several of them, causing them to make costly mistakes.

The grey market refers to unofficial trading outlets that were overlooked by the main sellers. We will discuss what is grey market premium & other related terms for you in this post.

What is Grey Market?

Individuals buy and sell IPO stocks or applications before they are publicly listed for trade on the stock exchange in an unauthorised market known as the Grey Market IPO. There are no restrictions in place because it is an unregulated over-the-counter market.

All trades are carried out in cash and on a one-on-one basis. This trade is not backed or supported by any third-party organisations such as SEBI, the Stock Exchange, or brokerage.

Since there is no legal system or system of regulations for grey market trade, it is done by a handful of individuals. ‘Grey Market Premium’, Subject to Sauda and ‘Kostak’ are three prevalent words in the grey market IPO.

What is Grey Market Premium?

The grey market premium (GMP) is the price at which grey market IPO securities are sold before they are listed on the stock exchange.

Simply put, the equity of the firm that issued the initial public offering (IPO) is bought and sold outside of the financial markets. The GPM predicts how the IPO will perform on its first day of trading.

For example, if a business issues an IPO for INR 550 and the grey market premium is approximately INR 130, we can expect the IPO to list at roughly INR 680 on the first day of trading.

There is no guarantee but in majority of cases, the GMP is correct and the IPO is listed at the provided price.

Note

Since this is an unauthorized market, neither the stock exchanges nor SEBI, nor the entities themselves, back it in some way. This system is based on cash purchases and a loyalty mechanism established by the brokers or traders.

Since faith is the most essential element in trading in the grey market, where there are no forums or regulations, the quantity of traders associated is limited.

This also implies that the grey market is not a perfect representation of the broader stock market, where the shares would trade if it were to be listed.

What is GMP in IPO ?

The Grey Market Premium(ग्रे मार्केट प्रीमियम), or GMP, is the price at which IPO equity stocks are exchanged in the grey market.

This may be favorable or unfavorable, implying that the grey market selling value is better or weaker than the issue price, depending on request and availability for the stock.

Often, investors who do not want to take the risk of their stocks not being allocated through an Initial public offering will purchase stocks on the grey market in the hopes of flipping them on the IPO for a gain.

Example of Grey Market Trading

lets find out what is gmp in ipo with example.

Zomato

This indicates that buyers are willing to pay 1000+400 = Rs 1400 for Zomoto Share.

RSVL LTD

Note

grey market trading is mentioned in many internet forums without naming either the Buyer or the Seller. This is something that many sellers overlook.

If you want to trade on the grey market, keep an eye on this and be aware you understand if the GMP is for Buyers or Sellers depending on the context If nothing is specified, it is most likely the Seller’s rate.

How IPO Grey Market Works?

There are two ways to make money in the grey market. The first option is to buy and sell IPO securities in the grey market before they are publicly traded. The second option is to sell your initial public offering application for a certain price. Let’s take a look at each option separately how ipo grey market works.

Trading IPO Stocks in the Grey Market

Here are the major steps grey market ipo:

• Buyers & Sellers

• IPOs allow traders to subscribe for equity. They face an investment risk since they may not be allotted any stocks or may be allocated equities but the price of the stocks may fall below the issue price. Sellers are the people that do this.
• There are a few people who believe the stock is worth more than it was when it was first issued. They begin accumulating these stocks even before the IPO allotment procedure is completed.
• Buyers are the people who do this. Buyers contact grey market dealers to make an order to purchase IPO stocks at a particular premium.

• Dealers Role

• The dealer then contacts the sellers who subscribed for the IPO and asks whether they are interested to sell their IPO shares at a premium now.
• Nevertheless, if the sellers do not want to risk a stock exchange listing and prefer the premium, they can sell the IPO stocks to a dealer and profit.
• The seller, on the other hand, must complete the transaction with the grey market dealer at a specific price.
• The dealer receives the application details from the seller and notifies the customer that he purchased a particular number of stocks from the grey market sellers.
• The allocation has been completed, and sellers may or may not get a stock allotment.

• After IPO Allotment

• If the investor is allotted stocks, he may receive a call from the broker asking him to sell them at a specified price or transfer the securities to a Demat account.
• If the investor sells the shares, the settlement is based on the profit or loss as well as the grey market premium at which the buyers and sellers agreed.
• If the sellers are not assigned any stocks, the agreement is cancelled without a settlement.

• Trading IPO Applications in the IPO Grey Market

Here are the major steps :

• Buyers & Sellers

1. Although IPO applications feature sellers and buyers, equivalent to IPO stock trading. The cost of an application is set by buyers based on a variety of estimates and market factors.
2. They make the sellers an approach that they will acquire an IPO Application for a specific premium. To be protected, sellers may sell their application to a bidder thru a grey market broker for a higher price.
3. There is no requirement for the seller to be concerned regarding IPO stock allotment. Even if he did not receive an allotment, he is entitled to the grey market premium he received when he sold his IPO allocation.

• Dealer

1. The seller provides the dealer the appropriate form. Furthermore, the dealer informs the bidder that he purchased an IPO application from sellers on the grey market at a specified price.
2. The granting registrar is in charge of allotment. An allocation of stocks may or may not be received by the application seller.

• After Allotment

1. If stocks are allocated to the sold application, the dealer may contact either seller to request that the allocated securities be transferred to a Demat account or sold at a specific price.
2. When selling stock, the profit or loss is used to determine the settlement.
3. The agreement is said to be over without a settlement if no equity are allotted to the sellers. The seller, though, keeps his premium because he sold his application.

How to Locate a Grey Market IPO Dealer?

Although dealing is done by word of mouth, the Grey market cannot be reached and is not a physical entity. In the grey market, you are unable to exchange securities. Traders typically select their customers and sellers on an individual basis.

However, if you want to invest in IPO stocks through the Grey Market, you’ll need to contact a local dealer who can help you identify sellers and buyers who also use the Grey Market.

Towns like as Mumbai, Gujarat, Delhi, Jaipur, Kolkata, Bengaluru, and others have grey markets.

Why People Trade in Grey Market IPO?

Grey markets have existed for a long time, according to many traders and brokers. This is because it can be a great chance for ordinary investors and traders to acquire securities before it is listed, especially if they believe the share will rise in value.

It’s essentially a supply and demand problem. Another argument is that if a consumer wants to get out of an IPO before it is listed, he can do so on the grey market.

It also permits customers to purchase IPO stocks even if they missed the application deadline or want to purchase more stocks than the IPO application permits.

Why firm allow Grey market trading?

Before a firm is listed on the stock exchange, it trades on the grey market. Underwriters frequently use trading on these platforms to determine the optimal IPO valuation.

These markets assist underwriters in determining demand and the firm ‘s potential route if it is listed. In addition, there is at least a six-day wait before equities are listed on stock markets.

Underwriters are eager to begin selling and are ready to sell stocks in the grey market because time is money.

Kostak

Next is Important term is Kostak. The premium at which an Initial public offering application is exchanged in the grey market is known as Kostak.

After the application window has shut but the allocation has not yet been completed, applications are normally exchanged.

It’s unusual for anyone to trade an IPO application after it’s been allocated. Since the allocation mechanism considers every retail application equally, this is a method for investors to maximize their chances of receiving stocks.

Example

RSVL LTD

Issue Price: INR 480 Per Equity Stock
Lot Size of Share: 14
GMP: INR 350 to INR 360
Kostak (INR 100000): INR 2500 to INR 2600

As can be shown, the Kostak is far lower than GMP in terms of percentage. This means that the grey market predicts the issue to be oversubscribed, with just one lot allocated to each applicant on average.

Subject to Sauda

According to the Kostak rate, the sum determined when investors receive the company allotment on their IPO application is the Subject to Sauda on the application.

If one buys and sells an IPO application on the topic of Saudi Arabia, it means that one will receive the specified sum if the allocation is received; otherwise, the application will be cancelled.

One cannot predict their benefit in this case because it is determined by the allotment. Again, if one receives an allotment and sells an application for INR 11,000 and makes a profit of INR 16,000 on listing day, one can pay INR6,000 to the person who purchased the application.

Is Grey Market Trustworthy ?

Do not deal in the grey market trading unless you have a strong excuse to do so.

Also, keep in mind that the grey market accounts for a very tiny segment of the Indian stock market, so it isn’t a reliable predictor of how the markets will do as a whole.

GMP and Kostak represent just the grey market’s supply and demand, which may be extremely dissimilar from what one might see on the stock exchange.

Note

Your willingness to invest in a business should be solely focused on the quality of the firm’s fundamentals. The percentage of subscribers, GMP, and kostak should have no impact on your judgment.

Do not panic if you believe you would lose out on a valuable IPO; instead, buy shares/applications on the grey market. It is preferable to hold off until a better chance presents itself.

Remember that a firm’s fundamentals do not change instantly, and you can only purchase stocks when the equity is under priced by the market compared to your estimated fair price.

Is Grey Market IPO a part of the primary market?

The grey market is an informal market, although the IPO market is a SEBI-regulated and recognised channel for raising capital in the market. There is no official link between the primary market and the grey market ipo.

Where i can find Latest IPO Grey Market Premium?

You can find the grey market ipo of upcoming IPOs on below link:

IPO Grey market Premium 

Conclusion

Several stakeholders benefit from a grey market IPO: IPO issuers, underwriters, start-ups, previously large corporations, and, most crucially, traders

This is all from our side regarding ipo grey market. Although, if you have any doubts About grey market trading you can just comment below.

Other Related Blogs to what is grey market premium?

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IPO Grey market Premium 

IPO Process in India

FAQ About What is GMP in IPO with Example?