If you’re looking to invest in shares and want to be aware of the number of IPOs are happening in recent times. Every time there is news about IPO there’s talk of IPO gray market premium cost.
This has probably been on your head after all. What is the grey market premium? Or before the launch of the IPO What is IPO gray market price?
So, let’s talk about the latest news in today’s post.
What is Gray Market Premium in IPO or Stock Market
Gray Market, This is such a market where traders trade shares of the business in a non-official manner prior to it going public with the IPO for the business. The trading of shares is carried out in the grey market until the listing of the IPO for the company. Share market I wouldn’t. This could be between 10 and 12 days.
In addition, the gray market premium is an unofficial market share cost. Similar to BSE’s share market BSE, NSE is controlled by SEBI. When business is conducted in NSE or BSE the transaction is conducted in accordance with the regulations and rules of SEBI. SEBI regulates every transaction. But this doesn’t happen in the grey market. Much like SEBI which is a government entity, SEBI doesn’t have any influence over the market.
The gray market premium is totally unofficial It doesn’t have the laws or regulations of any other government. This is why trading in the gray market is a little risky. The gray market business is conducted by certain people only with mutual understanding.
What is the gray market’s function?
We’ve seen before how this is an unofficial market, which means that all trading that takes place on this market takes place through oral communication. The contracts for trading aren’t in writing form.
The market is only available in select cities. As with Mumbai Pune is held in Delhi, Ahmedabad, Surat. In this market, trading is handled by a few dealers. The role of the dealer is to connect the sellers and buyers. Additionally, it ensures that buyers and sellers finish their transactions.
What’s the IPO gray market premium(GMP) Price?
IPO Grey Market premium IPO Gray Market Premium (GMP) refers to the amount at which IPO share is traded on the market known as the gray.
What is Gray Market Premium? This is understood by using an example.
Imagine that the IPO for an X company is set to take place and the issue price of RS. 1000. It has been put in.
That IPO has 1LOT = 15 Shares. (Our minimal investment amount is 15000) If the gray market price in this IPO is 400 rupees. This means that the buyer is prepared to buy the shares of the company for 1400 rupees (1000 plus 400).
This happens if GMP has been found to be positive.
However, if the GMP is negative, we’ll have to check.
When the GMP of the company X is at an amount of Rs.-400 however the price of its issue is at Rs.1000 this means that people are willing to buy shares of the company at Rs.600 (Rs.1000-400).
It is known that the Gray Market Premium (GMP) of nearly all IPOs is highly unstable, which is why the investment in this market can be very risky.
also read: Derivatives in the stock market.
What is Kostak Rate?
Prior to any IPO of any business being announced on the market for shares the cost at which the application for the IPO is BUY/SELL is known as Kostak Rate.
We can understand this with simple terms,
If a buyer is willing to purchase the application of IPO from those who invest in IPO. Imagine that the buyer is willing to purchase the application for Rs.500.
The important thing to remember in this instance is whether there’s an allocation in shares, or not the buyer is ready to purchase shares in the IPO application.
It doesn’t matter if the allotted amount is or not the people who offer the application for IPO will be paid 500 rupees.
You must be wondering what the buyer will earn from this. The buyer is playing with probabilities. 4/5 of the 20 applications bought are also allotted shares. If the price is successful, then the buyer will earn a lot of money.
In the event of an allotment the seller must transfer shares of his account in demat to the purchaser, or else the seller has to share in the profits. If the allotment turned negative, then the loss is to be transferred from the purchaser to the seller. Dealers people ensure this process.
Once you have understood the concept of Koshtak Rates, you should be aware that the owner of an IPO application earns a fixed amount of profits. Furthermore, the danger that comes with IPO listing is fully transferred to the purchaser.
Advantages of Gray Market Trading
- If the investor who is a retail buyer doesn’t get the shares from the IPO allotment, they can purchase shares of the company prior to the IPO listing by using the grey market.
- In addition, IPO can take an exit even before it’s listed on the stock exchange.
- Gray Market Trading This IPO is performed prior to the listing on the market for stocks, because of which the Underwriters are informed about the price that will be reflected in the IPO.
- It is possible to get an idea of the way in which the IPO will be placed on the stock exchange, at what price it is likely to be.
- By using the gray market premium, underwriters are able to learn about the supply and demand of the IPO market.