What is Grey Market Premium in IPO?

In an IPO (Initial Public Offering), GMP stands for Grey Market Premium. It refers to the extra amount that buyers in the informal market are usually willing to pay for an IPO share before it is officially listed. It can act as an unofficial indicator that shows how the market generally views the upcoming IPO. A positive Grey Market Premium can suggest stronger demand, while a negative premium can indicate relatively lower interest. It is not an official measure, but it can offer an early sense of possible listing sentiment. This article explains what is GMP in IPO, along with an example, how it works, and how to calculate GMP. 

Grey Market Premium Example 

Grey Market Premium usually shows the extra amount that buyers may pay for an IPO share before it gets listed. It works as an informal indicator that reflects general demand and expected sentiment for the upcoming IPO. 

Here is a simple example that explains how IPO Grey Market Premium works. 

Example: 

Imagine an IPO where the issue price of a share is ₹100. If the Grey Market Premium is ₹300, it means buyers in the informal market are generally ready to pay ₹400 in total. This total comes from adding the issue price and the premium. It usually indicates stronger demand, but the premium can change based on market conditions. 

How Does the IPO Grey Market Work? 

The Grey Market usually functions through informal trading of IPO shares before they are officially listed. The points below explain how this process typically works, which will clarify the GMP in IPO meaning even more. 

Trading Takes Place Outside the Exchange

The Grey Market involves buying and selling IPO or unlisted shares through informal channels. These trades usually happen between individuals, third-party institutions, or large investors. 

Prices Depend on Mutual Understanding 

The trading price is generally decided through an agreement between the buyer and the seller. There is no official or regulated price for these shares before listing. 

No Formal Oversight 

The Grey Market usually operates without exchange supervision. There are no fixed rules or price controls for trades carried out in this space. 

Shares Move Directly to Demat Accounts 

Shares bought in the Grey Market are often transferred straight to the buyer’s Demat account. The exchange does not take part in this process. 

Shares are Identified Through ISIN 

Every pre-IPO share carries an International Securities Identification Number (ISIN) and a face value, which helps in tracking the share even when the trade happens informally. 

How To Calculate Grey Market Premium? 

Grey Market Premium is usually calculated by checking the difference between the informal trading price of a share and the IPO price declared by the company. This difference can offer a general idea of positive or negative sentiment before listing. 

The basic formulas for calculating GMP are: 

GMP = Unlisted Price - Official Price 

Positive Example 

If a share is trading at ₹120 in the informal market and the IPO issue price is ₹70, the difference is ₹50. This indicates a positive Grey Market Premium, as the informal price is higher than the official price. 
GMP = 120 – 70 = +50 

Negative Example 

If the same share trades at ₹120 but the IPO issue price is ₹160, the difference becomes –₹40. This suggests a negative Grey Market Premium, as the informal price is lower than the official price. 
GMP = 120 – 160 = –40 

Factors Influencing IPO GMP 

Several factors usually influence the Grey Market Premium and reflect how the market views the upcoming IPO. The points below explain the major aspects that can influence GMP. 

Company Fundamentals 
Strong financial performance, stable revenue growth, manageable debt, and a clear business model can generally create positive sentiment. Good brand value and experienced management often increase confidence, which can support a higher Grey Market Premium. 

• IPO Pricing 
  When the issue price is considered reasonable compared to similar companies, it can attract more interest. An offer that appears fairly valued can usually lead to stronger demand, which may support a higher Grey Market Premium before listing. 
• Subscription Numbers 
  Higher subscription levels, especially from institutional or high-net-worth investors, can indicate wider interest. Strong participation usually reflects higher demand, and this can have a positive impact on the Grey Market Premium. 
• Market Conditions 
  Stable or rising market conditions generally improve investor confidence. When the overall environment looks positive, investors may show more interest in new issues, which can support a higher Grey Market Premium. Weak sentiment can have the opposite effect. 
• Anchor Investor Participation 
  When large institutional investors take part in an IPO, it usually shows that they have confidence in the company. Their involvement can make other investors feel more assured, which may support a higher Grey Market Premium. 

Conclusion 

The grey market premium (GMP) is a measure of investor demand and sentiment for an Initial Public Offering (IPO) before it is traded on the stock market. Hence, it is important to understand what GMP is in IPO. 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 a reliable online trading app.