What is Grey Market Premium (GMP)?

Gray or Grey Market means a place where an unauthorized contract between IPO Investor and another person who may be a Stock Broker or another Investor or anyone which happens when the  company raises an IPO (Initial Public Offerings) and IPO Applications traded even before it is trading in the exchanges.

Grey market even have trades for the already listed stocks.

Grey Market premium is the flat gain of the share one who involved in the above grey market transaction.GMP Shall be positive or negative depends on the demand.

Even though the grey market is unofficial, the demand of the IPO shall be reflected in the Grey market premium. The GMP indicates the IPO Listing price on the Listing date.

Few alarming things to note:

• Grey market is an unofficial market for the IPO and there is no rules and regulations to control this grey market.
• Since the transactions are made in Cash and only on the Basis of “Trust” between two parties.
• GMP value is just an Indication and not an assured value of listing price.
• It is only a Price Manipulation.

How it works?

Lets us assume that a transaction is happening between two investors “X” & “Y”.

“X” is applying the IPO under retail category and selling to “Y”, who assume the company’s growth will be incredible, with a premium over  the issue price.

Let’s take an example of an IPO  Issue price is Rs.750 with the quantity 20. “X” is selling with a premium of Rs 100 to “Y” irrespective of its listing price.

There are three cases which can happen on the Listing date.

Listing below the issue price : i.e.)650Rs.

• Here “X” receives Rs.17,000 from  “Y” and gains profit of Rs.2,000.
• “Y” losses his premium Rs.2000 and another Rs.1,000 from the listing loss. Total loss for “Y” is Rs3,000.

Par Listing Just above the  issue price : i.e.)800Rs.

• Here “X” receives Rs.17,000 from  “Y” and gains profit of Rs.2,000.
• “Y” losses his premium Rs.2000 and gain Rs.500 from the listing. Total loss for “Y” is Rs1,500.

Bumper Listing over the  issue price : i.e.)1000Rs.

• Here “X” receives Rs.17,000 from  “Y” and gains profit of Rs.2,000.
• “Y” losses his premium Rs.2000 and Gains Rs.5,000 from the listing loss. Total Gain for “Y” is Rs3,000.

There is no trustworthiness but in most of cases the GMP works properly and IPO lists around the (Issue price+Premium).

Stay away from this Grey market because you might be fooled by the some manipulators. Always better to invest directly in the Primary Market. Tracking the Grey market premium is only for knowing the IPO Demand.

Happy Investing !!