Grey Market Premium or GMP is a word you may come across while beginning to research upcoming IPOs. Though it is not a formal or controlled market, the grey market can affect public opinion on an IPO of a firm. In this blog, we will go over the Grey Market Premium, its purposes, and why it matters for your investment.
What is a Grey Market?
The grey market is an informal and unregulated setup where people trade shares of a company’s IPO before those shares are officially listed on a recognised stock exchange. The market allows willing buyers and sellers to trade in unlisted companies based on an expected listing price. Securities authorities do not monitor or regulate the grey market, so you should exercise caution if you plan to consider its indicators. However, the grey market can provide you with a rough estimate of how the general market sentiment is shaping up for a particular IPO.
Not many brokers allow you to trade in unlisted companies in the grey market. In case you wish to trade in the grey market, you can open an account with Chola Securities.
What Is Grey Market Premium (GMP)?
Grey Market Premium (GMP) refers to the difference between the price at which a share is traded in the grey market and the IPO’s issue price. If a company has fixed the issue price at, for example, Rs 1,000 per share, and you notice that the grey market is trading those shares at Rs 1,200, the GMP is Rs 200. This premium indicates that buyers in the grey market are willing to pay Rs 200 above the issue price for each share.
Remember that the GMP is not a guaranteed or certified price. It just shows the excitement—or lack thereof—of certain investors before the IPO announcement. Sometimes a high GMP indicates that, upon real stock listing, you might find outstanding demand. Conversely, a low or negative GMP can point to weak investor enthusiasm.
Factors Influencing the Grey Market Premium
Overall Market Conditions
You might find better GMPs if the larger stock market is enjoying a bull run and investors have excess liquidity. On the other hand, during volatile times or bearish markets, even good IPOs could show a lower GMP. Company Fundamentals
Even though it isn't exactly based on fundamentals, the grey market reflects the strength of the company's business model, financial situation, and management team. A respectable corporation with a solid history could demand a better GMP.Demand and Supply
The GMP may increase as more buyers want to acquire shares prior to listing. If there are fewer buyers, or if the IPO seems overvalued, the GMP may either drop or remain at lesser levels.News and Market Buzz
Strong anchor investor involvement, positive media coverage, or analyst reports could all help raise the overall performance. Conversely, any bad news, legal problems, or disappointing subscription count could sour the grey market attitude.
Things to Keep in Mind when Trading in the Grey Market
Unregulated Market
Since the grey market is neither legally acknowledged nor controlled, any premium is vulnerable to alteration without any notice or control mechanism. Your investment decisions should not rely just on the GMP. Hence, investors with a higher risk appetite should venture into these trades and stick to well-known companies. Speculative Nature
Lack of openness means that rumours or speculative bets could have a major influence on the grey market. If you find a high GMP, you should confirm it by proper analysis. Never underestimate fundamentals over GMP
It's always important to do your own research by examining the company's financial statements, valuations, industry trends, and growth potential. Use the GMP as an additional indicator for investing in an IPO.
As an investor, it is crucial to maintain due diligence, diversify your portfolio, and stay informed about general market trends as you continue to develop your investment path. You will be in a strong position and make the right investment decisions if you combine basic analysis with a cautious approach to grey market indicators.