What is GMP in IPO?

The grey market IPO refers to the unofficial marketplace that is out of the purview of regulatory authorities like the SEBI and the stock exchanges. In this marketplace, investors buy and sell IPO applications before the shares of the company are listed on the exchanges. As there isn’t any platform for trading in the grey market, all the transactions are carried out in cash, on a person-to-person basis. Usually, trading in the grey market IPO begins after the public issue is opened for subscription and continues till the shares are listed. You can learn about IPO GMP meaning in this article.

What is Grey Market?

Grey Market IPO is an unofficial market in which individuals purchase and sell IPO shares or apps before they are formally listed on a stock exchange. There are no restrictions around the unauthorised over-the-counter market. Personal transactions are carried out entirely in cash. Any third-party businesses, such as SEBI, the Stock Exchange, or brokers, are not engaged or supporting this transaction.

Grey market trading occurs among a limited group since there is no official platform or set of regulations for this type of trade. 'Grey Market Premium' and 'Kostak' are often used in the IPO grey market.

What is Grey Market Premium?

The grey market premium refers to the amount at which the IPO shares of the grey market are traded. Shares of the company that will go public are bought and sold outside the stock market. Grey market premiums reflect the reaction to the IPO on the day it is listed.

Grey Market Premium Example:

Assume the stock Y issue price is Rs. 100. The grey market premium is Rs. 300. This means that investors are ready to buy the shares of company Y for Rs 400 (100+300)

Note: The IPO grey market premium depends on its demand.

Types of Trading in Grey Market

Grey market trade is divided into two categories:

• Buying or selling IPO shares before they are listed on the stock markets.
• Trading IPO applications at specified rates or premiums.

Steps to Trade IPO Shares in the Grey Market

Trading IPO shares in the grey market entails the following steps:

• Buyers and sellers participate in IPO applications on the grey market, just as they do in IPO share trading.
• Buyers set the application's price based on market circumstances and assumptions, while sellers receive a premium.
• Sellers may sell applications through a grey market broker to increase security.
• Sellers receive the agreed-upon premium even if they do not obtain share allotments.
• Sellers send information to the dealer, who then tells the buyer of the purchase.
• The issuing registrar determines share distribution, and sellers may not be allotted shares. 
• If shares are assigned, sellers can transfer them to a Demat account or sell them at a predetermined price. The profit or loss is used to settle the transaction if shares are sold.
• If no shares are allotted, the transaction is completed without settlement, but the seller obtains the premium.

How Does IPO Grey Market Work?

The hidden realm of grey market trading exists outside the established stock exchanges and regulatory agencies such as SEBI. Let's investigate its internal workings.

Imagine this: Two investors, Mr. A and Mr. B, are interested in a company's planned IPO. Mr A applies for shares in the retail category but is unsure about his allocation. In contrast, Mr. B, desperate to gain shares, avoids conventional procedures.

Mr B contacts a grey market dealer to purchase lots from the IPO and negotiates an offer with Mr A for an additional Rs 500 per share over the IPO price, subject to an allocation.

This assures Mr A a profit of Rs 500 per share, regardless of the listing price. If Mr. A obtains the allotment, Mr. B will gain ownership. Upon allocation, the dealer orders Mr. A to sell to Mr. B at the agreed-upon price. If the IPO's listing price exceeds Rs 500 per share, Mr. B profits; otherwise, the scenario is reversed. This describes the dynamic realm of grey market commerce.

How to Calculate IPO GMP?

Once you understand 'what is IPO GMP?', you may use the notion to decide whether to invest in an IPO. The Grey Market Premium of an IPO is an important indication for determining the demand and price of an IPO (Initial Public Offering) before it is officially listed on the stock market. To calculate the GMP, compare the IPO update price in the main market to its trading price in the grey market. 

You may use the following method to calculate the IPO GMP. 

GMPR = Gray Market Premium * Number of shares 

Here is a Step-by-Step Guide on How to Calculate GMP of IPO

To determine the GMP of an IPO, follow these steps:

• Gather Information: Before determining the grey market premium, gather information on the IPO's grey market premium and share price. 
• Determine the GMP: To calculate GMP in an IPO, subtract the issue price from the IPO grey market price.  For instance, if the issue price is ₹100 per share and the IPO grey market price is ₹102 per share, the GMP IPO will cost ₹2 per share.
• Calculate GMP Percentage: Divide the GMP by the issue price and multiply by 100 to get the GMP percentage. According to the above example, the GMP IPO percentage is (2/10) x 100 = 20%.

Important Features to Consider About GMP IPO

To make an informed decision, understanding the features associated with GMP IPO is essential. The following are a few key features to consider about GMP IPO:

• The grey market is an unofficial IPO market where investors and stockbrokers engage in IPO transactions. These unofficial transactions are built on mutual trust.
• Find out what is GMP today.
• Before applying for an IPO, get valuable insights by doing IPO analysis.
• The market research or expert source determines the grey market rates.
• Trading in the grey market is considered illegal.
• The Kostak rate refers to the premium received by selling your IPO application to someone off the market, even before the IPO is listed.
• The Kostak rates may fluctuate before listing.
• Consider the company’s fundamentals for subscription decisions.

Utilising Grey Market Data for IPO Investment Strategies

IPO Grey market information may be utilised in a variety of ways. Here are some examples.

• To gauge demand for the IPO: The grey market premium for an IPO is a strong predictor of its demand. If the GMP of an IPO is high, it suggests that the IPO is in great demand. 
• Assessing the Risks of an IPO: The grey market premium may also be used to determine the risk of an IPO. If an IPO's GMP is low, there is less demand for the IPO. This might indicate that the IPO is dangerous. 
• To Determine the Listing Price of the IPO: The SME IPO grey market premium may also be utilised to calculate the listing price. If the GMP of an IPO is high, the IPO will likely list at a higher price than the issue price. 

Conclusion
The grey market premium (GMP) is a measure of investor demand and sentiment for an Initial Public Offering (IPO) before it hits the stock market. It is the difference between the IPO grey market price and the IPO price, reflecting the premium that investors are ready to pay for IPO shares. A high GMP suggests significant demand and probable price appreciation, whereas a low or negative GMP may signal lower demand or downward pressure on the stock price. To apply for an IPO and make the process smoother choose the reliable online trading app.