Grey market and Grey market premium 

Grey market and Grey market premium 

Subject :Economy

Section :Money Market

LIC shares are now trading at a mild discount in the grey market, signaling negative to at par listing.

Concept:

A grey market/Parallel Market  is a place where trading takes place ‘unofficially’ before the listing of a scrip in the secondary market. In this market, financial securities are traded and investors trade for shares or IPO applications before they are listed in the secondary market.

A typical example of a grey market is a business selling merchandise of a particular company even though they are not the authorised dealers in the market. In this market, the shares are bought or sold even before they get listed for IPO.

Grey market is not backed or regulated by any third party firms like the Securities and Exchange Board of India (SEBI).

Grey Market: How does it work?

Trading in the grey market is done in cash and in person. It gives an idea about the demand and value for an IPO before listing.

The IPO GMP or Grey Market Premium starts unofficially in the unregulated market after the IPO date and price band are announced. Grey market premium is the extra amount the buyers are ready to pay over and above the issue price. For example – assume the share price of a company is Rs 100 and GMP is Rs 50, it means the people are ready to buy the shares at Rs 150.

Indicates-It may be noted that when premium falls in the grey market, it is an indication that grey market traders are assuming that the issue will be listed at discount. When the premium increases in the grey market, it indicates that the IPO will list at a higher price than the issue. Example-If the company comes up with an IPO of ₹100 and the grey market premium is around ₹20 then we can assume that the IPO might list at around ₹120 on its listing day.

Trading in the grey market is very risky because SEBI or any other regulatory body for securities is not involved in this. Transactions are totally executed on a mutual trust basis in the grey market.

Kostak is a term which is used for the amount a person is ready to pay for the IPO application before the listing. One can buy and sell their full IPO application on Kostak rates in the grey market and make a profit. For instance, if a person has 3 applications for one IPO and sells each application at a premium of Rs 2,500 premium, it means that the individual has secured a profit of Rs 7,500. If he gets the allotment in 2 applications, still his profit will be the same. When he will sell the stocks earned in two applications, he will have to share the profit with the person who bought the application. If one buys or sells the IPO application on the subject to ‘sauda’ it means one can get the said amount if one will get the allotment otherwise sauda will be cancelled.