Know How ‘Grey Market’ Work! : Before Bidding an IPO
Gray market brokers specialize in unofficial transactions, similar to the official stock market. New companies are attracting investors through Initial Public Offerings (IPOs), creating a buzz in the primary market. The number of applications exceeds available shares, and discussions on the ‘Grey Market Premium’ (GMP) have become intense among applicants.
With the surge in IPOs, some investors base their decisions on gray market prices. To understand the gray market, its operations, and its reliability for investment decisions, it is essential to examine its nature and operations.
IPO image (credit-linkedin)
Know How ‘Grey Market’ Work! : Before Bidding an IPO
What is the Gray Market?
Grey Market: The Grey Market is a secret, unregulated side market that operates alongside regular stock markets like the Mumbai Stock Exchange and National Stock Exchange.That’s why you have to know Before bidding an ‘IPO’… Know how ‘grey market’ work! It is where new companies sell their shares before they are officially listed on the main market. These transactions occur quietly and without approval from the official market watchdog, SEBI.
How do ' gray market' work in buying and selling?
In the gray market, investors trade shares through brokers, connecting with sellers who have applied for an IPO (Initial Public Offering). This process is done in cash, in person, and involves physical transactions. The difference between the price at which shares are officially listed on the stock market and the price agreed upon in the gray market is settled on the day of listing. This process happens outside the watchful eye of SEBI (Securities and Exchange Board of India) and comes with inherent risks.
Participating in the gray market involves some uncertainty and may not be as secure as trading on the regulated stock market. The difference between the price at which the shares are officially listed on the stock market and the price agreed upon in the gray market is settled on the day of listing.
What is Gray Market Premium (GMP)?
In the world of official stock markets like BSE, NSE, and SME forums for small and medium enterprises, companies going for an ‘IPO’ (Initial Public Offering) rely on their reputation, goodwill, and how attractive their proposals are to consumers. But here to many people are don’t know how Grey Market work, Here’s the deal: the more people want a piece of a company’s shares, the higher the ‘GMP’ (Gray Market Premium) before the shares officially hit the market.
Now, let’s break down what ‘GMP’ really is. It’s the extra amount a buyer in the gray market is willing to pay above the ‘issue price’ of the IPO. In the gray market, shares are traded informally, based on trust between market traders. For instance, if an SME IPO is priced at Rs 50 per share and it’s trading at Rs 95 in the gray market, the Gray Market Premium (GMP) for that IPO is Rs 45.
How is the premium calculated?
Well, it depends on how much demand there is for a company’s IPO. If there’s a huge demand and a lot of people want to buy shares, the ‘GMP’ tends to be higher. If the number of applications exceeds the available shares, ‘allotment’ (the distribution of shares to applicants) becomes more competitive, making it tougher for applicants to get shares.
Even in this situation, ‘GMP’ tends to be higher. On the flip side, if there’s less demand, ‘GMP’ is lower. Also, the premium in the gray market can change until the shares are officially listed on the stock market
What do 'GMP' Indicate?
The Gray Market Premium (GMP) can give us a pretty good idea of how excited people are to grab shares of a company during its IPO. Here’s the scoop: if the GMP is high, it suggests that the stock market debut on the listing day might be a bit of a rollercoaster. Conversely, if the premium is low, the stock market debut could result in modest returns.
Also read – https://navjyotbharat.com/union-budget-2024/
Where to check GMP – https://www.chittorgarh.com/ipo/maxposure-ipo/1618/
How reliable is the decision based on 'GMP'?
Well, nobody can guarantee exactly how much the shares will be worth after the IPO. However, using ‘GMP’ as an indicator is not a bad idea to assess whether the listing might be profitable or not. But here’s the catch: it’s not wise to solely rely on these signals when applying for an IPO. Market analysts point out that while it’s challenging, it’s not impossible to manipulate or deceive ‘GMP’.
That’s why the actual stock market debut can vary, generally landing 15 to 20 percent above or below the ‘GMP’. It’s particularly crucial to be cautious with small companies listed on the SME forum, where manipulation of ‘GMP’ might be more likely. So, while ‘GMP’ can be a useful tool, it’s not the only factor to consider when deciding to apply for an IPO.
What Should Investors Consider?
Before diving into an IPO, investors should take some important steps. First off, give the ‘Draft Red Herring Prospectus (DRHP)’ a good read. This document, filed by the company with ‘SEBI’ (Securities and Exchange Board of India), spills the beans on everything you need to know – from the company’s business and pricing to potential risks. You can find this draft proposal on the SEBI website.
Dig into the details: What’s the company’s business sector? Where does it operate? Who are its customers and promoters? How’s the past and present performance? These are crucial questions to answer. Companies often hype up their offerings before an IPO, but don’t let the advertising fool you. Instead, focus on the company’s future plans, financial position, sustainability, and the reasons behind the IPO.
When the IPO opens, many investors decide to jump in based on the hype and demand it’s generating. However, a massive response doesn’t necessarily mean it’s a smart investment. While it’s true that during the IPO, shares might be priced reasonably, those same shares might be available at even lower prices in the future market. So, take your time, do your research, and make informed decisions before taking the IPO plunge.