News of an IPO (Initial Public Offering) release is not restricted to the official stock market. The grey market is also there. This is an over-the-counter market in which people sell and buy shares before they have floated on the market.
A concept related to this market is the Grey Market Premium (GMP). What is this GMP, then? Let’s unfold this in detail in this article.
What Is Grey Market Premium?
The Grey Market Premium, or GMP, is the rate at which IPO stocks are traded in the grey market before their listing. For instance, if a firm has fixed the IPO price at ₹100 and the corresponding GMP is ₹120 on the grey market. The GMP would be ₹20. This demand helps identify the investor interest.
The level of GMP shows the possible IPO performance. Higher GMP points towards higher demand, while lower or negative GMP points towards low demand. In turn, existing market speculation affects GMP, which makes it inaccurate.
Factors Affecting Grey Market Premium
Here are factors affecting GMP.
- Market Sentiment: The overall state and trends of the general stock exchanges.
- Company Reputation: The issuing company’s image and record.
- Subscription Levels: Share demand during the period of IPO subscription.
- Economic Conditions: The economic climate of the country and investors’ confidence in a specific economy.
- Broker Recommendations: Impacts arising from brokers and analysts.
- Speculation: Rumours in the unofficial market.
Terms Associated with Grey Market
Let’s see some of the terms related to the grey market that can impact any latest IPO.
Grey Market Stocks
Grey market shares are stocks bought and sold in markets other than official stock markets. These trades exist outside the market authorities and are relatively speculative. Nevertheless, they are useful in offering a heads-up on how a stock might perform in the market.
Grey Market Trading
This deals with the purchase and sale of shares before they float in the market. This market operates unofficially and is not regulated by the securities exchanges. Investors use this market to speculate on the listing price of the shares once they are publicly traded.
Kostak Rate
This rate refers to the premium one receives by selling their IPO application in the grey market before the shares are allotted. It is the amount an investor can earn by transferring their IPO application rights to another buyer in the grey market.
For instance, if a trader sells an application for ₹500, then the Kostak rate is ₹500. This process allows investors to make a profit without waiting for the IPO shares to be allocated or listed on the market.
How is GMP Calculated?
GMP is determined with the help of the demand and supply conditions prevailing in the grey market. It reflects the mood of the investors and current market trends. The premium is decided based on investors’ willingness to pay over the IPO price
Simple Calculation of GMP
You can calculate it roughly by using the formula:
GMPR = GMP x Q (Where Q is the number of shares issued to the public for the first time in the primary market.)
Conclusion
Recollecting the GMP and Kostak rates can help one realize the performance of an IPO more easily. However, trading in the grey market is high risk. However, understanding GMP can help investors find the trend of a company post-listing. To apply in IPOs, open demat account online.
Brandon is the cheif editor and writer at WorldUnfolds.com. With a passion for storytelling and a keen editorial eye, he crafts engaging content that captivates and enlightens readers worldwide.
