In the stock market, players generally talk about the primary market and the secondary market. We all know Primary, is the market where companies float their share for the first time to the public, and anyone interested bids for those shares, and if the bidder is lucky enough and hasn’t made any mistake while filling up the application, willget the share of the company, when floated.
A secondary market is a market where a share comes from the primary market and exchanges hands among the investors at a specific price. Here only those shares can be sold by investors which already owned. There are many marketplaces in the form of exchanges, where these company shares are bought and sold electronically.
- These two markets are the prominent market of the stock market and organized. However, there is a third market and unorganized which is called the ipo grey market watch. IPO Grey market is a market, where an individual buys and sells shares of companies, even before they are launched in the market officially.All transaction in this market is done in cash and in person. There is no third party like bankers, regulators, exchanges are involved.As this is an unorganized market, there is a very small set of people involved inthe same and there are no set rules and regulation that defines the market.
Two major terms used in the grey market are, “Grey market Premium”, “Kostak”.
Grey market premium refers to the premium amount at which any IPO is traded in the grey market before the shares are officially listed on the exchange.
The Grey market premium (GMP) generally reflects the sentiments of investors towards any IPO. Also reflects the listing expectation of the IPO. Let say, in the grey market FSN E-commerce venture was trading a premium of approximately Rs.600 and the price band of the IPO was set at Rs1085- Rs1125. So, as per the IPO grey market today, the NYKAA shares are expected to list at a price of Rs1125+Rs600=Rs1725. However, investors must notice that it’s an expectation of the market and not a set rule that is bound to happen. Nykaa may list at Rs1725, as per GMP, it may list above this price or below this price as well. Investors can take cues from the grey market but must do their research before investing.
The second most common jargon of IPO grey market is the Kostak Rate. This rate refers to the amount, investors pay for its IPO application. One can buy and sell theirapplication at a kostak rate outside the market and fix their profit. Kostak rate applies in every condition of allotment. let say, one applied for 10 lots for one IPO and sold them at a rate of Rs 2000 per lot, the individual secured a profit of Rs 20,000. But, in case, the shares allotted are only 5 lots, even then the investor will get Rs20,000. However, once he sells the share post allotment and makes any profit out of them, that profit has to be given to the person to whom the application was sold.
Working Of IPO Grey Market.
There are two ways to trade in the Grey market
- The first being selling and buying IPO shares.
- The second is selling the IPO application at a certain price.
Understanding Buying and Selling shares at Grey market.
- Some investors take financial risk and apply for IPO, they might get allotment, or not even listing may happen below or above the allotment price. These investors are sellers in the grey market.
- Some investors who feel that share will be listed a premium than the issue price, start collecting shares, even before they are listed and they become the buyers of the Grey market.
- These Buyers start bidding for the IPO shares by contacting the dealers of the Grey Market.
- Dealers contact the seller, who has applied for IPO, and ask whether they would like to sell their share a premium at this time.
- Seller,if agrees then he/she will sell the IO shares and book the profit.
- Dealers get the application details and send information to the buyers about no. share purchased at a certain price.
- Seller may or may not receive the allotment.
- If shares are allocated to the investor, he may get a call from the dealer to sell them at a certain price or transfer allocated shares to some Demat account.
- If the investors are selling the share then settlement is done depending on the profit or loss and the grey market premium at which the deal was finalized among the buyer and seller.
- If shares are not allotted then the deal gets canceled without any settlement.
Understand selling IPO application in Grey Market.
- Just like IPO shares trading, even IPO applications also include sellers and buyers.
- Depending on multiple assumptions and market conditions, buyers determine the price of the application. The buyer makes an offer to the sellers that he/she is willing to buy an IPO Application at a certain premium.
- To avoid financial risk, through a grey market dealer, sellers may sell their application at a certain premium to the buyer.
- In this case, there is no need for the seller to worry about the share allotment in IPO. Even if the seller didn’t get any allotment he/she still gets the grey market premium at which he sold his IPO allocation.
- The seller sends the application details to the dealer. Further, the dealer sends notifies the buyer that he bought an IPO application at a certain premium from the sellers in the grey market.
- If the seller gets the allotment, either seller may get a call from the dealer to transfer allocated shares to some Demat account or sell them at a certain price.
- The settlement is done based on the profit or loss, in the case of selling the shares.
- If there are no shares allocated, the deal is canceled without any settlement. But, the seller still gets his premium as he sold his application.
Keeping a track of the grey market might be giving investors a hint about listing the IPO. But one must be cautious, as it is not regulated and an unorganized market, thus dealing in this market must be done at own risk.