You are already accustomed to the idea of IPO (Initial Public Offerings). If you are investing in IPO for quite some time now, then it is slightly unlikely that you have missed out on a reference to the IPO grey market.
You must have heard your broker stating that the IPO you have invested in is quoting at a GMP (Grey Market Premium) or at a GMD (Grey market Discount). So in this article, we will define this market type and the features of this market.
What Is IPO Grey Market?
The IPO grey market is an unofficial market where people purchase or sell IPO shares or even applications before they are officially released for trading on the stock exchange. As this is an unofficial market that is over the counter as well and there are zero regulations around it. All transactions are fulfilled in cash on a personal basis. Any third party firm such as SEBI (Securities Exchange Board of India), Brokers, and Stock Exchange are not included or back these transactions.
Grey market trading is performed among the small groups of people as there is no official exchange or rules illustrated for this trading. Two famous terms that are used in this IPO grey market are “Grey Market Premium (GMP)” and “Kostak”. You can learn more about this in the Chittorgarh IPO grey market.
IPO Grey Market: GMP
GMP (Grey market premium) is a premium amount at which IPO grey market shares are traded prior to their listing on the stock exchange. In simple terms, the stock of the entity that came up with the IPO was purchased and sold outside the stock market.
The GPM portrays how the IPO might reciprocate on a listing day. For example, if the company releases an IPO or Rs. 100 and the grey market premium is nearly Rs. 20 then we can anticipate that the IPO will list nearly 120 rupees on listing day. There is no dependence but in most scenarios, the GMP functions properly and the IPO list around the given price.
IPO Grey Market: What Is Kostak?
Kostak or the value of the application is the premium amount at which the applications of IPO are being traded for in the grey market.
In other terms, the Kostak rate is a profit one earns by selling his or her IPO application even prior to the listing or allotment of the issue.
It is mainly useful for individuals who do not wish to risk listing gains or IPO allotment. In simple words, if you have a Demat account but you do not wish to subscribe to an IPO, you can sell your application to an interested purchaser in the grey market. Under these scenarios, your application will be subscribed by the purchaser on your behalf and she will pay you a specific amount for that. The profit you make is kostak rate. Kostak rates differ depending on the IPO. The benefit of this rate is that the purchaser may earn profit or face loss with her money, but you will receive a fixed kostak rate.
For example, if one did 5 applications for a particular IPO and sold the same at Rs.2500 for each application it implies that the individual received the IPO profit at Rs 12500. However, if he receives the allotment in just 2 applications still his profit will be the same. Further, if he or she sells the stock which he or received and gets the profit of nearly 25000 then he or she is required to give the rest of the profit to the guy who purchased the application.
How Does The IPO Grey Market Work?
In the grey market, there are mainly 2 ways to receive income. The first way is you can purchase or sell the IPO shares in the grey market prior to their listing on the stock exchange. The second way is you can sell your IPO application at a specific price. Let us discuss both ways individually.
Trading IPO Shares In The Grey Market
In simple terms, the stock of the entity that came up with the IPO was purchased and sold outside the stock market.
- Investors are applying for shares through IPO. They take an investment risk as they may not get allocated any share or they get the shares but shares may list below the issue price. These are termed as sellers.
- Few people think that the share values over its issue price. They begin assembling these shares even before they are allocated via the IPO allotment process. These are termed as buyers.
- Buyers or purchasers place the order to purchase IPO shares at a specific premium by contacting the dealers of the grey market.
- Next, the dealer contacts the sellers who have applied for the IPO and asks them if they are aiming to sell their IPO shares at a specific premium at this time.
- In the meantime, if the sellers are not aiming to take risk of stock market listing and such as the premium, they may sell the IPO shares to the dealer of the grey market and book the profit. However, the seller has to finalize the deal with the grey market dealer at a specific price.
- The dealer receives the application details from the seller and then sends a notification to the purchaser that he purchased a certain amount of shares from the sellers in the grey market.
- The allotment is performed and sellers may or may not get an allotment of shares.
- If shares are assigned to the investor, he may either receive a call from the dealer to sell them at a specific price or transfer assigned shares to some Demat account.
- If the investor is ready to sell the shares, the settlement is done relying on the loss or profit and the grey market premium at which the purchaser and sellers made a deal.
- In case if no shares are assigned to the sellers then the deal gets canceled without any settlement.
Trading IPO Applications In The Grey Market
In simple terms, the Kostak rate is a profit one earns by selling his or her IPO application even prior to the listing or allotment of the issue.
- Same as IPO shares trading, even IPO applications involve buyers and sellers.
- Buyers evaluate the value of the application depending on several assumptions and market scenarios. They extend an offer to the sellers that they are willing to purchase an IPO Application at a specific premium.
- To be on the safer side, sellers may sell their application at a specific premium to the purchaser via a grey market dealer.
- Here, there is no requirement for the seller to take tension about the share assignment in IPO. Even if he did not get any assignment he still receives the grey market premium at which he sold his IPO allocation.
- The seller forwards the detailed form to the dealer. Further, the dealer transmits a notification to the purchaser that he purchased an IPO application at a several premia from the sellers in the grey market.
- The assignment is done by the issuing registrar. The application seller sold may not or may get an allotment of shares.
- If shares are assigned to the sold application, either seller may receive a call from the dealer to send allocated shares to some Demat account or sell them at a specific price.
- In the scenario of selling the shares, the settlement is done depending on the profit or loss.
- If there are no shares assigned to the sellers, the deal is said to be over without the requirement of any settlement. However, the seller still receives his premium as he sold his application.
An IPO grey market is useful for various parties. Companies issuing an IPO, startups, their underwriters, previously big companies, and most crucially traders. Even in an authorized market, the traders take a guarantee for it because they can purchase shares that have not been listed on the exchange and there are chances of the share price rising in the future.