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Explained: What is Grey Market Premium and how shares trade in the grey market


Last week, the preliminary public providing (IPO) market in India skilled a flurry of exercise with the launch of IPOs by 5 corporations, together with Tata Technologies, Ireda, Flair Writing Industries, and Gandhar Oil Refinery. This surge in IPOs has sparked conversations about the grey market and grey market premium (GMP). Let us delve into what these phrases imply.
What is the grey market?
The grey market is an unofficial and unregulated market the place shares are traded even earlier than they’re listed on the principal exchanges.Unlike alternate trades which can be carried out electronically, transactions in the grey market occur in particular person. Although these trades happen outdoors the purview of rules, they aren’t thought of unlawful, in accordance with ET.
What is the grey market premium?
Grey market premium refers to the extra worth that traders are keen to pay over the IPO worth in the grey market earlier than the inventory is listed on the alternate. The inventory is informally traded in the grey market based mostly on mutual belief between merchants. For occasion, if the situation worth for an IPO is Rs 450 per share and the inventory is buying and selling at Rs 470 in the grey market, the GMP of the IPO will likely be Rs 20.
How is the grey market premium calculated?
The calculation of GMP primarily displays the demand and provide dynamics of a inventory in the IPO. Traders’ notion of the variety of shares that may very well be allotted in the providing performs a big function. Arun Kejriwal, founding father of Kejriwal Research and Investment Services, instructed ET that if the probabilities of share allotment improve, indicating extra inventory accessible on the market, the GMP will fall. Conversely, if the probabilities of allotment scale back, suggesting fewer shares accessible, the GMP will likely be larger.
The costs in the grey market additionally transfer in tandem with subscriptions in the IPO. Generally, larger subscription charges result in larger GMP, and vice versa. However, irregular reactions of GMP based mostly on subscription needs to be taken with warning.

How can you purchase and promote shares in the grey market?
To purchase shares in an IPO, patrons strategy grey market brokers and supply to buy at a sure worth or premium. The brokers then strategy potential sellers who had utilized for the IPO. Sellers might select to promote if they’re unsure about the itemizing worth and don’t wish to maintain the danger. It is vital to notice that bodily switch of shares doesn’t happen in the grey market. Once shares are allotted to the vendor, they’re transferred to the patrons by means of the brokers, with money settlements. All transactions are settled at the itemizing worth, and any distinction between the itemizing worth and the beforehand quoted worth is settled on the itemizing day.
Hence, at 9:45 am on itemizing day, the buying and selling quantity tends to surge for quite a few IPOs. However, these trades pose a danger as they function outdoors the oversight of each the exchanges and Sebi.
Read From ET | About buying and selling in grey market
What does the grey market premium suggest?
The grey market premium signifies market sentiment for a selected IPO based mostly on demand-supply dynamics. A excessive GMP suggests sturdy demand and potential upside in the inventory on itemizing. Conversely, a low GMP signifies weak demand and a modest or weak itemizing.

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How correct is the grey market premium?
While the GMP might not replicate the precise itemizing worth, observing GMP tendencies can present merchants with insights into the inventory’s post-listing route. Market specialists state {that a} inventory normally lists inside a spread of 15-20% round its GMP worth.
Can grey market premiums be manipulated?
Manipulating the grey market premiums is difficult for big IPOs. However, market specialists warning that smaller IPOs might be prone to GMP manipulation. There have been speculations about costs being managed in the grey market for IPOs of small and medium enterprises. Hence, whereas making use of for shares in an IPO, the GMP shouldn’t be the sole issue to contemplate, says Arun Kejriwal. He means that GMP is 70-80% correct, with a margin of 5% up or down regarding the itemizing worth.



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