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What is Grey Market Premium in IPO: How is GMP Calculated & Reliable?

What-is-Grey-Market-Premium-in-IPO

An initial Public Offer (IPO) is the primary market, where you can invest in companies that are not yet trading on the stock exchange but get listed after the IPO launch. However, buying the shares in IPO is not guaranteed, sometimes due to high demand.

Investing through an IPO is not easy, as there is a limit for retail investors and when an IPO is oversubscribed there is no assurance, you will get the allotment of shares into your demat account. Because in an open market if GMP is high, it will be oversubscribed and on the listing day it will be open at a very premium price and can give good returns to investors.

When the Initial Public Offer (IPO) of any well-known company comes into the market, another word also starts buzzing in the stock market is GMP or called Grey Market Premium. You might also have listened about this word, so today here we will tell you everything about GMP, what it means exactly, how it works with examples and how is calculated.

What is the Grey Market in Stocks?

Grey market stock is the shares of the company that are offered and bid by the traders unofficially in open markets. When a company offers the shares to traders before these stocks are officially launched through IPO, then it is known as Grey Market Stock.

Usually, a group of few individuals run the grey market stock, and all the transactions and dealings are performed mutually on the trust of each individual. Right now, In India trading in the grey market stocks is legal and unofficially done. And all the trades that have been accomplished cannot be settled until the official trading started.

What is GMP in Share Market or IPO?

Grey market premium or GPM is a kind of premium amount at which shares of grey market IPO are traded before they are listed on the stock exchanges. In layman's language, the stock of any company that launched the IPO is bought and sold outside the stock exchanges or sock market. To make it understand in a better way, let’s take an example.

Suppose a company launched an IPO with a share price of Rs 500, and in the grey market premium is Rs 100, which means the share of the IPO is going to list on the stock exchange at Rs 600, with a premium of 20% from the issue price.

However, there is no guarantee the stock will list with the same premium, it can go beyond or below that price. As a grey market premium of IPO mainly depends on the demand for the shares and most of the time GMP works listed around that price.

What is Kostak Rates IPO Grey Market?

In the IPO grey market, there is another important terminology called Kostak Rates, before listing an IPO that is the amount an individual pays for the IPO application. Anyone can buy or sell the entire IPO application on Kostak Rates outside the market at the pre-determined profit.

And when anyone sells his IPO application, in the grey market and gets the premium amount for the same, then whether he gets the allotment of shares or not, Kostak rates apply in every condition and he will enjoy the profit.

For example, if anyone bid through 5 applications in an IPO, and sold at Rs 5000 per application, that means that individual has secured the IPO profit of Rs 25000. Unfortunately, if he gets the allotments in only 2applications, then also his profit will be the same. However, the stock is listed at a very high premium, and he earned a profit of Rs 50000, then he has to share the remaining profit with the person who bought the application after paying the premium for IPO.

How Does Grey Market Premium Work?

Grey market premium helps investors to understand whether the IPO is safe to invest in or not. In the grey market, there are two ways, when trading takes place shares are bought and sold to earn profits.

The first method is buying or selling the IPO shares in the grey market before they are getting listed on the stock exchange. While in the second method, instead of shares, the buying and selling of IPO applications take place at a certain fixed price.

How is GMP Calculated in IPO?

Calculating the GMP of any unlisted stock is very easy. Suppose the IPO price of a company is Rs 500 per share and the GMP of that unlisted stock is Rs 100, then it is expected that shares of that company are going to be listed at around Rs 600.

Though, the value of GMP is varied depending on the demand for shares in the grey market. You can check below the formula to calculate GMP.

GMPR = Grey Market Premium * Number of shares

How to Check the Grey Market Premium of IPO?

To check the Grey Market Premium of IPO there is no specific website or place. Just keep reading the leading news portals and websites covering and publishing IPO and stock market-related news. After the opening of the IPO till the listing date, as per the demand in the market, the GMP of an IPO keeps changing and be vary from initial days to till listing date.

Is Grey Market Premium Accurate & Reliable?

No, the Grey Market Premium of any IPO is not always accurate, as sometimes GMP is very high at the launch of the IPO but when there is no significant demand for shares in the IPO, the GMP comes down at the time of listing of the stock.

However, most of the time grey market premium is accurate and almost close to the price of stock listed on the stock exchange. And it can be one of the reliable tools while deciding to invest in any IPO, as it shows how much return it can give on the listing day. Hence, most traders or retail investors also use this as an indicator to invest in IPO.

Also Read: Golden Rules of investing in Stock Market

How Does GMP Affect the Stock Price on Listing Day?

GMP of an IPO is a kind of physiological price that investors or traders see before the day of listing. It is not necessary for GMP always be positive, sometimes the GMP is negative, which means the stock is going to list below its IPO issue price.

The GMP is determined as per the demand and supply of that particular stock in IPO. If the IPO is oversubscribed, means the demand for shares offered in the IPO is much greater, and GMP will be higher. While on the other hand, if the demand for the shares is lower than the shares offered through IPO, then the GMP will be also lower.

Also Read: How Shares are Allotted in Oversubscribed IPO: Allocation Process

GMP does not affect the stock of an IPO, instead due to physiological factors on the listing day, traders or investors try to buy or sell the stock around that price that has been defined in the grey market before the date of listing on the stock exchange.

If a company is fundamentally strong and has good potential to grow in future with high-profit margins and promising returns on equity, then investors try to buy stocks of such companies even at higher rates. And therefore sometimes, the stock of such companies is offered at discounted rates through IPO and then can be listed beyond the GMP.

Summing-up

Grey Market Premium is simply the price of the IPO stock that is not yet listed showing how much premium or discount the share is going to list on the stock exchange. When shares in an IPO are issued at a discounted price and the IPO is oversubscribed, then the GMP of that stock is always at a premium. While, if any stock in IPO is overvalued and offered already at a premium price, then there is less chance of GMP, instead it might list below the IPO price.

Also Read: How to Increase the Chances of IPO Allotment

Most of the traders and investors who don’t know how to evaluate the shares of the company or don't know whether a stock is overvalued or undervalued, simply track the GMP of any company that launched the IPO. Higher the GMP, then they also bid at cutoff price in the IPO with a motive to monetize their IPO investment with a listing gain of the stock.

Also Read: What is Cutoff Price in IPO and Why Bid at Cutoff Price

How to Invest or Apply in IPO?

If you have a trading and demat account with any broker, you can easily apply for the IPO. If you don’t, just open the demat account and trading account now with Moneysukh and invest in the IPO. Here you will get updates on all coming and ongoing IPOs with their details like price, launch date, GMP and reviews or analysis with recommendations by our experts, whether you should invest in any particular IPO or avoid it. To apply for an IPO follow the steps below.

Step1:To apply for an IPO, through Moneysukh, visit trade.moneysukh.com.

Step2: Here you have to log in through your Moneysukh User ID & password.

Step3: Now Navigate to the IPO section and select the IPO in that you want to invest.

Step 4: Here just fill in the required details like price, quantity, and so on.

Step 5:Now complete the payment process and submit the application.

Step 6: You have successfully applied for the IPO, wait till the allotment.

Also Read: How to check IPO allotment status on NSE, BSE through Moneysukh?

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