What is Grey Market, How to help in smart investment in IPO?
By Sharawan Rawat January, 22 2025 17:40 PMThe grey market is an informal market where transactions of goods, services, or financial instruments take place outside their official or regulated market. In India, the grey market is most commonly used in the context of IPOs (initial public offerings). This market is completely unregulated, but is seen among investors as an indicator of how successful an upcoming IPO may be.
The grey market is a platform where the trading of shares starts even before their official market listing. For example, if a company is issuing shares through its IPO and its listing in the stock market is yet to happen, then investors or brokers buy and sell these shares in the grey market.
Key Points
- Informal Market The grey market is completely unregulated and is not recognised by the Securities and Exchange Board of India (SEBI).
- Related to IPO: It is mainly used for shares that are not yet listed on the stock exchange.
- Basis of Transaction: Transactions are based on verbal agreements or personal trust.
- Risk: Since it is not regulated, there is a high risk of fraud and risk.
How does trading happen in the grey market?
The trading of shares in the market happens through GMP (Grey Market Premium). GMP is the price at which the shares are trading in the grey market Example for the issue price of an IPO is ₹500 and its GMP is ₹100, it means that the price of that share in the grey market is ₹600 (₹500 + ₹100).
Key Elements of the Grey Market
1. Casting
- Casting means that investors sell their application in the grey market. If an investor has applied for ₹1 lakh in an IPO and is willing to sell it, he can do so through casting.
2. Off-market trading
- This is the process in which shares of an IPO are sold or bought before they are listed.
3. Risk management
- Transactions in the grey market are unregulated, and there is a high chance of fraud. Therefore, it is considered more risky than the regulated market.
Benefits of the Grey Market
- Early indication GMP can be used to predict how an IPO will perform at the time of listing.
- Profit booking opportunity Investors, who wish to sell shares before listing, can use the grey market.
- Market sentiment study It is a way to find out investor sentiment and market mood.
Disadvantages of Grey Market
- Lack of regulation Since it is unregulated, there is no legal protection.
- Risk of fraud Transactions are based on verbal agreements, which leads to a risk of betrayal.
- High volatility Grey market prices are highly volatile and can change at any time.
- Illegal It is an informal process, and is not legally recognised.
The future of the grey market
Everyone in India has mixed views about the Grey Market Although it is heard a lot among investors and brokers because there is no law on it, it is also popular among both of them, but due to its irregularity and lack of legal recognition, it has to face a lot of criticism. But still, these investors also have a lot of faith in it, use it and take its help for their savings, due to which the future of the grey market is bright in the future.
Tips related to grey market
- Do research before investing in any IPO. Look carefully at all the financial statements of the company along with GMP. Do not invest blindly on GMP alone.
- Take care of the risk as well. Before investing in the grey market, read all the articles carefully and it is important to keep all types of risks in mind while investing.
- Give preference to regulated markets along with GMO. Give preference to investing in the regular stock market instead of the Grey Market. So that you can get solid information about the market.
- Take advice from experts before investing in any IPO. Consulting a financial advisor before investing can be a wise step.
Importance of Grey Market Premium (GMP)
- Investors’ inclination towards IPO shows that if GMP is high, it means that investors are excited about that IPO. And there is a high possibility of profit by investing in this IPO.
- GMO being high means that it is a sign of profit. High GMP indicates that the investor can get good profit at the time of listing. And it also attracts investors to its side, due to which the number of investors also increases towards this company.
- Risk can be estimated in advance from GMP, it is not fixed but is mostly correct. If GMP is low or negative, it means that investing in an IPO can be risky.
Trading in Grey Market
Trading in the IPO grey market begins with the announcement of the IPO issue price until the shares are listed on the exchange. The following are some of the key features of IPO Grey Market trading.
- Unofficial and unregulated market.
- Trading in the grey market takes place usually via telephone calls.
- Settlement of trade happens only in cash, generally using services of Angadia.
- Transactions in the grey market are based on mutual trust.
- Round the clock market that works 24*7.
- No regulatory body governs IPO Grey Market trading.
- No official or registered dealers are involved.
- No formal contracts are issued for transactions conducted in the grey market
Grey market trading usually involves three parties: the buyer, the seller, and the dealer. Grey market trading takes place either through the trading of IPO shares or IPO applications.
To trade in the Grey Market, as a very first step, an investor needs to find a grey market dealer. Since the grey market dealing happens solely on trust, the dealer builds clientele through references. Thus, an investor can start trading in the grey market when he is referred to a dealer through a good and reliable.
Conclusion
GMP plays its tax role towards investors, especially in the context of new IPOs. While this market provides investors with an opportunity to get early signals and make profits, its irregularity and lack of legal structure makes it risky. Hence, investors need to be cautious and do proper research while transacting in this market.Investing in the Grey Market can be profitable, but it requires expertise and prudence to minimize the risks.
Also, for more information on What is Live IPO GMP, Why it is Important for Investors and How it Works, IPOs information, IPO GMP, New IPO or any other information stay tuned here.
