The Ultimate Guide to the IPO Grey Market and Relevant Tips!

If you are a regular investor in IPO, often you may have come across the term “IPO Grey Market”. News agencies and brokers regularly talk about Premium or Discounted rates at which IPO is being traded at Grey Market. Often novice traders get confused about these terms and take irresponsible decisions and ultimately lose money in the market. Let’s understand this in concept in detail.

What is IPO Grey Market?

It’s an over the counter market where IPOs are traded before actual listing on the market on mutual trust. IPO Grey markets are not regulated by SEBI, and hence it’s an unofficial market. All the transactions are done via brokers, and payment is through unofficial channels. SEBI, or Stock Exchange do not play any role and are not involved in transactions that takes place in the IPO Grey Market.

So, though the IPO grey market is a part of the regular IPO market, there is no specific relation between IPO market and IPO grey market. Trading in IPO grey market is not within the limits of SEBI

Grey market trading can be classified into two parts:

  • Trading allocated IPO shares after the allocation but before the listing on the stock market at a premium rate or discounted rate.
  • Trading of IPO application before allocation at Premium rate or Discounted rate. 

Trust is the vital component in the Grey Market trading as no set of rules applies to transactions made under the grey market. 

What do the terms “Grey Market Premium” or “Grey Market Discount” means?

Grey market premium

If the rate of IPO application or IPO shares is trading in Grey Market at a price higher than the bid price, then the IPO is said to be trading at Grey Market Premium.

Grey Market Discount

If the rate of IPO application or IPO shares is trading in Grey Market at the lower or discounted price than the bid price, then the IPO is said to be trading at Grey Market Discount.

*Grey market Premium or Grey Market Discount tells the price at which the buyers or sellers want to trade their IPOs.

For Example: Grey Market Price of SBI CARDS IPO

IPOs NameOffer PriceGrey Market PremiumKostak PriceSauda
SBI Cards IPO ₹750 – ₹755 ₹340 – ₹345
High: 350
Low: 198
₹4300 – ₹4500
High: 4500
Low: 1200
₹6000 -₹6200

How are prices regulated in the Grey market?

Rule and regulation for IPO grey market

Various factors drive the pricing of IPOs in Grey Market as there is no specific regulation for it. Factors like the interest of Retail traders, Institutional traders, how much oversubscribed the IPO is, who are the promoters, and who are the underwriters play a crucial role in deciding the Grey Market Price of IPO. 

Lack of regulations on Grey Market price makes it highly volatile and risky.

Let’s take an example, MR. A buys an IPO at the bid price of INR 14,000/-. In the grey market, the stock is trading at a 50% premium. MR. A decides to sell the stock in Grey Market and thus clocks in the profit of INR 7000/-. 

When the stock actually lists on the market, it opens a 75% premium. This means, MR. A had had to suffer a loss of INR 3500.

Is there actual trading of share in IPO Grey Market?

Grey market is a small group of people who indulge in the unofficial trading of IPO applications and allotted IPO shares. They transact on the basis of mutual trust. As this is unofficial trading, no actual selling or buying of shares takes place. They are generally conducted via telephone or on a slip of paper.

What is Kostak Price?

It is the actual price where one can sell his/her IPO in the Grey Market. The more demand drives Kostak price higher and lowers demand drives Kostak Price lower. Higher Kostak price leads to Gre Market Premium rates and lower Kostak price leads to Grey Market Discounted rates.

Let’s understand this with an example

ABC Pvt. Ltd is offering an IPO
Issue price: ₹ 520 per share
Lot size: 14
Grey market Premium: ₹ 370 to ₹ 380 
Kostak(₹ 100000): ₹3000 to ₹ 3500

In this case, the Grey market premium of the IPO is around 74% of the bid price, but the Kostak price of the issue is well below 8%. The reason for such a low Kostak Price means the issue will over-subscribe and hence they are ready to buy the IPO subscription for ₹ 3000 to ₹ 3500 as this will yield a profit.

Is there any regulatory body that regulates the Grey Market?

As we discussed earlier, the Grey Market operates on greed and fear! There is nobody that regulates the price or trading in the Grey Market. These lacks of regulations make trading in the Stock Market very risky.

Is IPO Grey Market risky?

IPO Grey market is safe or risky

Absolutely! There is always a counter party risk while buying or selling shares in the Grey Market. The trades are not regulated, and there is no counter party present for the clearance of transaction and trading. This is the reason; regulators and brokerage firms de-motivate investors to trade in the IPO Grey Market. 

What is the Utilization of the IPO Grey Market?

Optimally, the IPO Grey Market can be used as an indicator by investors to understand the appetite of the IPO. This can help them decide where the actual price of the stock will go after listing on the market. These assumptions can be used to decide whether to invest in a particular IPO or not.

Also Read: A Complete Guide for IPO Investment in India

Should I Trade in IPO Grey Market?

As a responsible financial website firm, we strongly de-motivate our visitors from buying or selling at IPO Grey Market. The reason for this advice is clear; IPO Grey Market is not regulated by SEBI or any other regulatory body. So there is no security on the transactions made in the IPO Grey Market.

Moreover, the pricing in IPO Grey Market is highly volatile. So you run a risk of losing money in a trade which might have helped you gain profit. So, it’s better to avoid the IPO Grey Market and focus on the regular market.

Note: For more information on investment in IPO, pls write to us for your query or write in below comments section.

More Article on IPO

Full form of IPO
How to apply for an IPO?
What is IPO Grey Market and IPO Grey Discount

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