The understanding of IPO issue working is not a simple exercise and involves many intermediaries. One such entity or a market that works in an unregulated way in the IPO even before the IPO is open for public subscription.
In a grey market, the shares are traded even before IPO issue is open and the price for trading in such a market is usually priced at a premium to the likely issue price.
Why pricing for the IPO share is at a premium?
The merchant bankers, company promoter and market operators price it over a premium than the likely issue price to create an impression of a good demand for the share. So, the prices in such a market can only be influenced to a certain degree as the fundamentals of the company are tracked.
Other factors that influence price of the IPO shares in the grey market
As the grey market is primarily comprised of HNIs and market operators, the cost of funding for HNIs is also considered. The other factors which influence the sentiment of the grey market is the expected pricing of the issue. If the IPO issue is expected to be priced high then on the assumption that there shall be not much takers to the issue, the price in the grey market will go down.
How trading is done in the grey market?
On faith even before the actual shares are opened for issued and listed, the trading is done in the IPo shares in the grey market. When IPO is issued and the likely allotment and listing is done, the trades are regularized by entering them in the system.