What is Grey Market Premium? Is It Part OF IPO Market?

Have you come across the term "Grey Market" Or "Grey Market Premium(GMP)"? What is a grey market? Grey market, in simple words, is an unofficial market for financial securities. When a stock has been halted from trading, or when new securities are purchased and sold before official trading begins, grey market trading occurs.

Moving further, What is GMP? The price at which shares are exchanged in the grey market is known as the grey market premium. Furthermore, GPM is the price at which grey market IPO shares are sold before they are listed on the stock exchange. Simply put, the stock of the firm that issued the IPO is purchased and sold outside of the stock market.

How does GMP transaction work?

Let's say the IPO price of stock "A" is Rs 100. When the grey market premium is Rs 200, it suggests that investors are willing to pay Rs 300 for firm A's shares. In the grey market, this is how a typical transaction goes down. 

Let's understand in a little deep with another example. Suppose Shubham is a stock market trader and in an upcoming IPO, he has been assigned around 1000 shares at a certain issue price. Meanwhile, other investors, known as 'buyers,' believe that the share's worth is substantially higher than its issue price. These purchasers are willing to pay a 'premium' for grey market shares. 'Sellers' are investors like Shubham who are contacted by grey market dealers.
 
They come to an agreement to sell the shares for a certain price i.e, Premium, then the issue price. If Shubham finds the offer good enough but doesn't want to risk the stock's listing, he sells his shares and takes out the profit from it.

Grey Market IPO

It is an unofficial over-the-counter market with no regulations. In this individuals perform buying and selling of IPO shares before they are officially launched for trading on the stock exchange. Third-party businesses such as SEBI, Brokers, or Stock Exchanges are not engaged or supporting this transaction.
 
Because there is no official platform or set of standards for these trades, grey market trading takes place among a limited group of people. 

However, the GMP predicts how the IPO will perform on its first day of trading. For example, if a business does an IPO for Rs.200 and the grey market premium is approximately Rs.50, we may expect the IPO to list at roughly Rs.250 on the first day of trading. There is no guarantee of accuracy, but in the vast majority of cases, the GMP is correct and the IPO is listed at the provided price. 

 Is GMP Part OF IPO Market?

As said above, it is an unauthorized and unregulated market, whereas the IPO market is a SEBI-regulated and recognized way of generating capital in the market. There is no formal link between the IPO market and the IPO grey market.

With this, we can say that GMP is not part of the IPO market. However, it may predict how the IPO market will perform on its first day of trading.