In an IPO, Grey Market Premium is entirely referred to as GMP. As a result, we will examine the world of the most recent IPO GMP (Grey Market Premium) and its impact on the IPO scene today. Let’s start by understanding What is GMP in IPO.
Imagine meandering through the bustling aisles of Delhi’s Gaffar Market or the vibrant lanes of Mumbai’s Heera Panna Market. These well-known marketplaces are now commonly associated with grey markets. Similar to how real grey markets provide early access to in-demand goods, the Grey Market Premium (GMP) IPO allows investors to evaluate the demand and potential value of newly issued shares before they are legally listed on the stock exchange.
What is Grey Market?
Investors trade shares and applications in an unofficial, clandestine market known as the “grey market,” often termed the “parallel market,” before them being properly listed on the stock exchange. At this intriguing location in India, cash transactions are conducted in person. This has nothing to do with any third-party institutions, including stock exchanges or SEBI. Kostak and Grey Market Premium are two key terms to remember while participating in a Grey Market Initial Public Offering (IPO).
To understand What is GMP in IPO, it is the difference in price between the issue price, or the number of shares made available to the public, and the price at which the stocks are traded on the grey market before being formally listed on the stock exchange. The premium, to put it simply, is the additional amount that buyers are willing to part with for shares in an IPO before those shares are legally offered on the secondary market.
For instance, the ABC Company recently announced that each share of its initial public offering (IPO) will have an issue price of ₹20. Before the shares were legally listed on the stock exchange, they were originally sold informally on the grey market, where each share was priced at ₹25 during the initial public offering. ₹5 (₹25–₹20) is the suggested grey market premium (GMP) for the most recent initial public offering (IPO).
Unlike the primary and secondary markets, SEBI does not regulate this particular market. The IPO’s GMP, which is mostly determined by market forces, reflects the dynamics of supply and demand for the shares on the grey market. Let’s look at the various types of trading that are possible on the grey market after understanding what an IPO’s GMP entails.
How Does IPO Grey Market Work?
Outside of regulated organizations like SEBI and authorized stock exchanges lies the shadowy realm of grey market trading. Let’s examine its internal mechanisms.
Let’s say that a firm that is set to go public has attracted the interest of two investors, Mr. A, and Mr. B. Mr. A, unsure of how to spend his money, apply for shares in the retail industry. On the other hand, Mr. B circumvents the customary procedures in his pursuit of shares.
Reaching out to a gray market dealer, Mr. B purchases lots from the IPO. He makes Mr. A an offer of Rs 100 per share over the IPO price, subject to allocation.
This guarantees that, regardless of the listing price, Mr. A will get Rs 100 per share. Mr. B becomes the owner if Mr. A receives the allotment. After allocation, the dealer orders Mr. A to sell to Mr. B at the prearranged price. If the IPO’s listing price exceeds Rs 100 per share, Mr. B benefits financially; if not, the converse happens. This is a concise overview of the fascinating realm of illicit commerce.
How to Calculate GMP in IPO?
Once you have understood ‘What is GMP in IPO?’, you could use the concept to decide whether or not to buy an IPO. The Gray Market Premium of an IPO is a key indicator used to determine the demand and price of an IPO (Initial Public Offering) before it is officially listed on a stock exchange. Consequently, comparing the IPO update price in the primary market with its trading price in the grey market is necessary to calculate the GMP.
As a result, the formula for IPO GMP calculation is provided below.
GMPR = Gray Market Premium * Number of shares
A Step-By-Step Guide to Calculate GMP in IPOs
Take the following steps to find the GMP in IPO’s:
Obtain Information: Before determining the grey market premium, find out the share price and details of the most recent initial public offering (IPO).
Determine the GMP in an IPO by subtracting the issue price from the gray market price. For example, if the issue price was ₹100 and the IPO grey market price was ₹102, the GMP in IPO would be ₹2 per share.
Divide the GMP by the issue price to determine the GMP percentage, then multiply the resulting number by 100. Based on the aforementioned example, the GMP in IPO allocation is (2 / 10) x 100 = 20%.
Important Features to Consider About GMP in IPO
The following are a few crucial GMP in IPO traits and considerations:
- Engage in clandestine gray market transactions with investors in the initial public offering (IPO) and stockbrokers. The basis of these relationships is mutual trust.
- Right now, find out the premium on the gray market.
- Seek useful information by reading our IPO analysis before submitting an IPO application.
- Grey market pricing is determined via the use of market research or expert sources.
- Trading in the gray market is illegal, and we strongly discourage it.
- The Kostak Rate is the amount you get paid to sell your initial public offering (IPO) application to a third party off-market before the issue is released.
- Proceed with caution if you decide to subscribe to the IPO rates at a premium, as the premium is subject to alteration before listing.
- Make sure that the company’s essential principles are the sole factors you consider when choosing a subscription.
How Does the GMP in IPO Impact the Listings?
The gray market premium of an initial public offering (IPO) indicates the level of investor interest and demand for the shares before the stock’s official launch. It affects the IPO listings in both positive and negative ways. A negative premium indicates a probable decline in demand or pressure on the stock price, whereas a positive premium suggests increased demand and perhaps a price rise.
Well, you have completely understood the concept of “ What is GMP in IPO”. well, Investors can gauge demand and sentiment around an initial public offering (IPO) by looking at the grey market premium (GMP) before the offering opens for trade on the official stock exchange. A high GMP indicates strong demand and a potential price rise. On the other hand, a low or negative GMP might indicate decreased demand or pressure on the stock price to decline.