IPO Grey Market: Understanding Grey Market Premium and Trends
An IPO Grey Market Premium is an important trend for investors to watch before any Initial Public Offering (IPO). The IPO Grey Market is an unregulated Over-the-Counter (OTC) marketplace in which shares and applications for IPO shares are traded prior to their actual listing. Since it goes away from the perusal of the Securities and Exchange Board of India (SEBI), almost all the transactions are carried on a cash basis from one person to another.
What is IPO Grey Market Premium (GMP)?
The Investors would pay additional price over and above the issue price to buy an IPO share in the grey market which is termed as the IPO Grey Market Premium. For instance, if an IPO share is officially priced from ₹380 but grey priced at ₹420, the IPO Grey Market Premium is counted costlier by ₹40 (₹420 – ₹380).
IPO Grey Market Trends
The IPO Grey Market Trends are thus majorly driven by speculation, demand, and investor sentiment. A strong IPO Grey Market Premium generally indicates high expectations at listing, whereas a low or negative IPO Grey Market Premium may indicate weak interest in the IPO. However, these trends are purely speculative and investors should exercise caution since they are not guaranteed indicators for predicting listing gains.
Is the Grey Market a Part of the IPO Market?
The IPO Grey Market is an entirely different ball game from the actual IPO market. The IPO Grey Market is totally unregulated while the IPO market is under SEBI supervision. IPO Grey Market Premium may give an insight into the sentiments of the retail investors, but it has no legal standing at all with respect to the stock market.
Important Points to Consider About IPO Grey Market Premium
- Understanding the Grey Market Dynamics: Unregulated IPO Grey Market works on trusting between investors and brokers.
- IPO Analysis Importance: Always refer to an IPO analysis report before buying anything.
- Sources of Grey Marketing Rates: IPO Grey Market Trend is sourced from market research and expert opinions.
- Do Not Trade in Grey Market: IPO Grey Markets are illegal and financially hazardous.
- Understanding Kostak Rate: The Kostak Rate is the premium earned by selling an IPO application before the stock gets listed.
- Consider Fundamentals Before Subscribing: Never rely on IPO Grey Market Premium alone; always check the fundamentals of the company prior to applying.
Types of Trading in IPO Grey Market
There are two broad categories of trading in the IPO Grey Market:
Trading of Shares Before Listing
This is how the grey market trading in the shares works:
- An investor applies for an IPO and places an offer to sell shares before allotment.
- The trade is mediated by a grey market dealer who quotes IPO Grey Market Premium.
- In case both accept the terms, the details of the transaction are exchanged.
- In case of allotment, shares are sold via an off-market transaction.
- Otherwise, the transaction is extinguished.
Trading of IPO Applications
Full applications for IPOs are being bought and sold in the IPO grey market. The mechanism involved in this is stated below:
- An investor applies for an IPO.
- Because of the heavy demand, they sell the entire application at a fixed KOSTAK rate.
- A grey market dealer arranges the buyer and seller.
- In case of allotment, the shares are transferred; and in case shares are not allotted, the seller keeps the already agreed amount.
How to Calculate IPO Grey Market Premium?
The IPO Grey Market Premium calculation is based on the following equation:
IPO Grey Market Premium = Grey Market Price – IPO Price
The following are the steps to calculate the IPO Grey Market Premium:
- Look for IPO Price: The announced price must be the official price set for the IPO by the company.
- Check Grey Market Price: Since IPOs are an unofficial market, you should check with brokers or any other online sources to find out what the prices are.
- Afterwards, to find the IPO Grey Market Premium, calculate IPO Grey Market Premium as the difference between the IPO price and the grey market price.
Example Calculation
- If the price of the IPO share is ₹200, then the grey market price sells at ₹225, thus giving an IPO Grey Market Premium of ₹25 (12.5%).
- This shows an excess demand before listing but does not guarantee performance in the end.
Income Tax Implications of IPO Grey Market Trades
IPO Grey Market trades, in cash, therefore the tax liability comes on the seller. Before short-term trades on official stock exchanges, capital gains tax is levied, but in an IPO Grey Market, profit is credited to applicants who sell their IPO application.
How Can You Use IPO Grey Market Information?
IPO Grey Market Trends can help investors with the assessment of demand before they subscribe to an IPO.
- Interpretation of a low IPO Grey Market Premium suggests weak demand and investors must act cautiously.
- An interpretation of a high IPO Grey Market Premium indicates strong demand and investors are highly encouraged to apply for the IPO.
Conclusion
The IPO Grey Market Premium indicates demand for the stock before listing. The higher the IPO Grey Market Trends, the greater the potential listing gains. However, these are speculative and can be very risky. Investors should, however, analyze the company fundamentals before getting involved with reliance on the IPO Grey Market Premium. Trading in the IPO Grey Market being unregulated has legal and financial ramifications. Thus, a discerning interpretation of IPO Grey Market Trends and investment decisions should be applied.
FAQs on IPO Grey Market Premium
Q1. Is IPO Grey Market Trading Legal in India?
Ans. No, it is not regulated by SEBI and GREY IPO is illegal in India.
Q2. How Reliable is IPO Grey Market Premium?
Ans. Speculative; No recourse is offered for listing gains. Market conditions and investor sentiments would govern its course in such a case.
Q3. Why Do Investors Track IPO Grey Market Trends?
Ans. Investors track the IPO Grey Market Trends in order to feel the market tone and its expected performance on listing before applying for an IPO.
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