When an investment bank fails to price an initial public offering (IPO) appropriately, a phenomenon known as the “grey market premium” develops, allowing the first wave of retail investors to purchase shares at a greater price than they would have if the investment bank had priced the IPO correctly.
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What is GMP, and how is it calculated?
The difference between the initial public offering (IPO) price of newly issued securities or commodities and the price of those same securities on a stock exchange or other freely accessible trading venue is known as the “grey market premium.”
When an IPO is sold on its primary market, it is sold at a fixed price. It can be traded at a different price, known as the “grey-market premium,” just before it is listed on the stock exchange.
To get the grey market premium for a specific IPO, use the formulas below:
GMPR = GMP x Q
GMP stands for Grey Market Premium, and Q represents the volume of shares that were sold on the primary market.
Grey Market Premium- Understanding the Basics
The grey market often develops when an investment bank values an IPO below the going market rate or when it does not price the IPO on IPO watch high enough to ensure that it is fully subscribed.
According to reports, investment institutions are afraid of deals on the grey market since they may result in losses.
Grey market trading gives investors the chance to buy shares of a company at a lower price than they would have before the offer was announced if they think the offer undervalues the stock. This is especially true if the offer’s conditions restrict the supply of the share while demand is high.
Some brokerages have occasionally raised the grey market premium to a maximum of 40%. A new policy known as “Price Band” has been implemented by the NSE to stop this activity. To get around this, numerous brokerages have issued additional initial public offerings (IPOs) through Demat, which typically receives higher GMP.
In a grey market, non-broker dealers sell shares of an initial public offering (IPO) before the trading day is scheduled. Some nations forbid this practise, while others allow it. In America and India, it is also referred to as the direct market. Other names for it include pre-market trading and unofficial market.
What does GMP mean in the stock market in India?
In an Indian initial public offering, a “grey market” occurs when the broker-dealer sells the shares to the customer for more money than the SEBI-set price.
Grey market premiums are mostly used to gain early access to the hottest new issues before normal / public investors can purchase them.
The sellers profit by capitalising on the demand for these stocks among purchasers who would otherwise have to purchase after the official listing at a higher price, while the buyers get into these hot problems at pre-fixed pricing.
Since the introduction of FPOs, grey market trading has been anticipated, however it might be forbidden or limited for specific IPOs.
- The grey market premium may be considered as one of the essential factors while deciding whether an IPO will give good returns or not.
What are the parameters for GMP in the stock market?
The price that confident institutional investors are willing to pay for the IPO differs from the IPO’s original public offering price. This difference is known as the “grey market premium.”
Grey Market Premium = Investors ready to pay – Actual IPO price
Investors purchase newly issued shares that corporations have made available to a select group of private clients in this sort of trading. Retail investors who are prepared to pay a premium for purchasing these shares early have a significantly larger demand for them. Value investors now have a fantastic chance to purchase IPO shares before they are made available to the general public.
In link-in-time IPOs with substantial share demand, the grey market premium is typically more significant. A compelling business strategy, distinctive assets, or effective management may be to thank for this.
Grey market premium- A Special Indicator
If the IPO does not receive enough interest on the stock exchange, the grey market helps to assure that there will be enough demand for it. By doing this, businesses can avoid offering their shares at a loss or even cancelling their initial public offering.
The overall health of the economy has an impact on both the most recent IPO and the current IPO for the grey market premium. Companies that go public during a period of economic prosperity will have a higher probability of success than those who launch during a period of economic collapse since IPOs are based on investor confidence. If there is little demand for shares in an IPO, the grey market premium could be detrimental.
The price at which investors are willing to buy or sell securities that are not traded on any exchange is known as the “grey market premium.” Another name for it is an off-market premium. The grey market for bonds, money, commodities, artwork, collectibles, and antiques is distinct from the grey market for stocks.
The grey market premium in India -GMP
The main distinction between the Indian stock market and those in other nations is that it enables anyone interested in purchasing unlisted companies to trade them. This gives those who wish to invest in a company’s stock but lack the knowledge and time to assess whether they should do so a chance to do so.
When a corporation issues its shares on a stock exchange, it launches its new IPO (initial public offering). The shares of those firms trade on the exchange itself and can be purchased or sold by individuals as well as organisations like mutual funds and pension funds after the IPO is added to the impending IPO list and appears on it.
Conclusions
Due to their liquidity and ease of buying and selling, listed equities are valued higher than their corresponding unlisted counterparts (Grey Market Premium). In comparison, unlisted equities are more risky than listed ones and cannot be traded rapidly.
Investors purchase on the first day of listing in order to benefit from this premium and make a quick profit. As is common knowledge, the corporation experiences high levels of volatility on the first trading day for that specific counter. For investors who had accumulated that counter before the IPO, this oscillation or volatility offers plenty of opportunities to book profits.
Everyone needs to time their investment, but nobody needs to time the market.
Faqs on Grey Market Premium :-
| Q) What is GMP ? – The difference between the initial public offering (IPO) price of newly issued securities or commodities and the price of those same securities on a stock exchange or other freely accessible trading venue is known as the “grey market premium.” |
| Q) How is Grey Market Premium (GMP) calculated for an IPO ? – To get the grey market premium for a specific IPO, use the formulas below: GMPR = GMP x Q GMP = Grey Market Premium, and Q = the volume of shares that were sold on the primary market. |
| Q) What does GMP mean in the stock market in India? – In an Indian initial public offering, a “grey market” occurs when the broker-dealer sells the shares to the customer for more money than the SEBI-set price. |
| Q) Do GMP decide the success of an IPO? – GMP do decided the success of the an IPO (Initial Public Offerings) if the Grey Market Premium is higher than the price band set and trades are being made in higher volumes then this indicates the success of the IPO. |