What Is Grey Market Premium (GMP)?

 Before the actual listing day of an initial public offerings, there is usually some anticipation in the world of IPOs. Investors often search for early indications to forecast a stock’s potential performance, and one of the most widely used indicators is the grey market premium that shows up before the market actually opens.

What Is IPO Grey Market Premium?

Grey market is the channel for the informal exchange of securities or goods that are not approved by the original issuer or producer. Investors can purchase and sell IPOs on the grey market before their official listing on a stock exchange.

An IPOs grey market premium (GMP) is the price that investors are willing to pay for a company’s shares in this market. This premium reflects the market’s perception of the company’s potential and the anticipated demand for its shares.

How to Calculate Grey Market Premium

Grey market premium calculations are easier than they seem. It’s the difference between the IPO’s official price and the price at which shares are sold on the grey market.

As a simple example, the GMP would be ₹100 if the IPO issue price was ₹500 and the grey market price was ₹600. Divide the premium by the IPO issue price and multiply the result by 100 to get the GMP as a percentage. A premium of 20% would apply here.

Difference Types of IPO Grey Market Rate

The grey market premium is the main focus of the IPO grey market. GMP is a measure of investors’ enthusiasm for an IPO before its official launch. However, GMP isn’t the only significant rate type in the grey market; the Kostak rate and the Subject to Sauda rates are also important. Investors may gain an insight of possible demand and sentiment from these three market rates, which together make the grey market a lively center of unauthorized trade.

Kostak Rate

The Kostak rate is the premium you earn for selling your IPO application in the grey market prior to allotment. Regardless of the outcome of the allocation, someone basically pays you a certain price for the rights to your initial public offering application.

For example, if you sell your IPO application for ₹5000 Kostak, you will receive that amount regardless of whether the allotment occurs. Most people who aren’t willing to take any risks use this tactic.

Subject to Sauda Rate

Subject to Sauda is an agreement made on the IPO grey market where the person selling the IPO application only gets paid if they gets an allotment of shares. There is no deal, and no money is paid if no shares are given out. It’s a way for sellers to make extra money on IPO applications if the allotment is successful.

Why Is GMP Important in IPOs?

IPOs investors rely on the gray market premium as a signal. Before a company’s shares are publicly tradable, it provides useful information about possible market enthusiasm and expected financial gains.

A high GMP usually means that investors are really interested and that they expect to earn a lot of money. On the other hand, we could predict a more conservative market sentiment from a low GMP. The GMP is an informal measurement, which means its reliability is not guaranteed.

Find out deep details and differences of Grey Market Premium vs Listing Price: What Is Grey Market Premium and How It Impacts IPO Listings?