What is Grey Market Premium in IPO?

Grey market refers to the unofficial marketplace that operates outside the control of regulatory authorities like the SEBI and the stock exchanges. The GMP full form in IPO stands for Grey market premium IPO. It is the amount at which the IPO shares are traded on the grey market. Grey market premiums reflect the market sentiment of the IPO on the day it is listed. 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. Trading in the grey market IPO begins after the public issue is opened for subscription and continues till the shares are listed. Read on to learn more about “what is GMP in IPO”, GMP meaning in the share market. 

Grey Market Premium Example

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

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

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How Does IPO Grey Market Work?

The grey market trading exists outside the established stock exchanges and regulatory agencies such as SEBI. Let's understand how it functions.

Assume that 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 ₹500 per share over the IPO price, subject to an allocation. This assures Mr. A a profit of ₹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 ₹500 per share, Mr. B profits; otherwise, the scenario is reversed. This describes the dynamic nature of the grey market.

Types of Trading in Grey Market

As you are now aware of what is GMP in IPO and how it works, let’s understand its type. 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.
• 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 the value of the 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.

Formula to Calculate IPO GMP

Once you understand what is IPO GMP, you may use the concept to decide whether to invest in an IPO by learning how GMP is calculated. 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 formula to calculate the IPO GMP.  

GMPR = Gray Market Premium * Number of shares 

Step-by-Step Guide on How to Calculate GMP of IPO

The following is how to calculate the GMP of an IPO. 

• 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 the GMP IPO. 

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

Utilizing Grey Market Data for IPO Investment Strategies

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

• To Understand an IPO’s Demand: 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 potentially risky. 
• To Determine the Listing Price of the IPO: The SME IPO grey market premium may also be utilized 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 is traded on the stock market. Hence, it is important to understand what is GMP 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.