GMP of IPO– Many people who are investing in the stock market know about what is IPO.
But most of them don’t have any ideas on GMP. The full form of GMP is- Grey Market Premium.
If you are investing in stocks or you want to invest in stocks then you need to know about these things.
This will give you knowledge as well as it can make your investment journey smooth.
Many also think that the word GREY in GMP can be an illegal indication.
So, here we will discuss GMP in detail.
As well as there are two more terms you should know- One is KOSTAK RATE AND THE SECOND ONE IS SS (SUBJECT TO SAUDA).
We will also discuss the risk factors of Grey market Premium.
So, to understand Grey Market Premium let’s first talk about its first which is GREY MARKET.
What is Grey Market?-
First, you should know about the White Market. It means it is all legal.
Like if you are buying or selling shares in the stock exchange then that is legal or that is allowed.
The other one is Black Market. That means it is not legal according to the law.
Like- Some of the drugs of the coronavirus were being sold on the black market recently at very high prices.
This is illegal.
Now there are some areas in between these two markets. That is called GREY areas.
It means it is also not illegal or maybe no regulation has been passed for it.
So, IPO GREY MARKET is an example of this. Here shares are traded but no regulation of SEBI works on it.
- Now the question is why?
Because SEBI’S regulation always works on all the listed companies that are listed on the stock exchange.
But the regulations will not work on the IPOs that are not listed on the stock exchange.
That means this is an unregulated market. That is why we called this a Grey Market.
Now, do you know at which time this Grey Market operates?
When an IPO comes, its issue price will be declared first. From this time until the IPO listing there will be a gap of 10 to 12 days.
Here trading starts within this time.
That means the application of the IPO also trades.
Or someone’s shares are allotted, then the shares are also bought from him in advance.
Why do people trade in Grey Market?-
The people trade here just because of their imagination. Like-
Let’s say that A very famous IPO has come into the market and its issue price has been declared.
Now let’s imagine the price is 1000 rupees.
Since it is a famous IPO, people think that it will be listed on the stock exchange at a very high price.
So, they want to buy the shares from other people no matter they have to pay some extra money for it.
Now let’s assume that they bought the shares at forty percent more, that is 1400 rupees.
Like this, they trade.
Because they think that if the share will list at a very high price ( like 60 to 70 percent extra ) then the rest of the money ( buying price 1400 (40 percent extra) and listed price let’s assume 1700 ( 70 percent extra) will be their profit.
This is the reason why people trade in the Grey Market.
But it is an Unofficial Market. Here all the contract or trades happens orally.
So, the contracts are not returnable.
These kinds of trades or contracts happen in some cities.
In these kinds of trades, there is a dealer in the middle.
The job of the dealer is to build a connection between the buyer and the seller.
The dealer also makes sure of the fact that the buyer and the seller should do the transaction.
Now, let’s understand Grey Market Premium.
How does the Grey Market Premium works?–
Let’s take an example.
Let’s assume that One IPO has come into the market with the issue price of 1000 rupees.
And one lot has 15 shares. So, the minimum investment will be 15000 rupees.
Now, one seller is ready to sell one lot of shares.
And one buyer gives the seller an offer that he/she will give a 300 rupees premium per share to buy from the seller.
The buyer did it because he/she thinks that the share will grow very very high after some time.
And this buyer tries to buy a lot of shares, not just one or two.
So, here the risk is transferring from the seller to the buyer.
But the seller is not losing anything because the seller is gaining 300*15=4500 rupees profit if he sells at least one lot or 15 shares.
After selling the net profit or loss will transfer to the buyer.
Oh yes, there is a dealer in between. Because the seller and the buyer don’t know each other.
Now if the seller thinks that he will take 500 rupees extra per share then he/she can demand it from the buyer.
So, here comes the Demand and Supply system.
So, it is called the Grey Market Premium because here the buyer is paying a premium to the seller to buy the shares before the listing of the share.
The buyer’s case study in GMP trading–
- CASE 1—
So, the issue price is 1000 rupees and he/she gave 300 per share so the buyer buys it for 1300 rupees per share.
Now, if the listing price will 1700 rupees (let’s assume) the buyer will earn the profit of 400 rupees per share.
So, for 15 shares the buyer will earn a profit of 6000 rupees.
- CASE 2–
Let’s assume the listing price will be 1100 rupees.
Yes, it can happen but for this, you can blame that you are at loss for the IPO.
Because the listing price is more than the issue price.
So, in the first case study, we have seen that the buyer is gaining.
But here the buyer is losing.
Because the issue price is 1000 rupees and the buyer paid extra 300 rupees per share to the seller as the Grey Market Premium.
So, in the second case study, the buyer paid 1300 rupees per share but after listing, he/she can sell it at 1100 rupees per share.
The loss is 200 rupees per share and for 15 shares the loss is 3000 rupees.
As I said before, that the risk is transferring from the seller to the buyer.
What is KOSTAK RATE in GMP?-
I will take the same example here also.
Here the buyer is ready to buy the application of the seller.
Application means the seller just applied for the shares. Allotment till not happen also.
But the buyer wants to buy the application. Does not matter that the allotment is going to happen or not.
Like the buyer can say that he/she will give 500 or 1000 rupees (let’s assume) to book the application.
Just like that, the buyer can book many applications.
So, here the buyer is playing with the probability.
Like if the buyer applied for 15 applications, it can happen that he/she will get few among them.
If any application got the allotment then the seller will transfer all the shares he/she has applied for into the DEMAT account of the buyer.
But if the seller did not get the allotment then the booked amount of the buyer will be at loss.
Remember that here the dealer will make sure that the profit will be transferred to the buyer from the seller.
As well As the dealer will make sure that if loss happens then it will be carried out by the buyer.
And if the listing goes down from the 1000 rupees also the buyer needs to give extra money to the seller.
The KOSTAK RATES are quoted per lot.
We have discussed GMP and we have seen that the GMP was quoting per share.
What is Subject To Sauda in GMP?-
In the KOSTAK rate section we have seen that the buyer wants to buy the application, does not matter that the allotment happens or not.
But here the buyer will make sure that if the allotment happens then he/she will pay some extra money (let’s assume 1500 rupees) for a lot.
So, here too the risk is for the buyer.
Here also the SS rates are quoted per lot.
Risk Factors in GMP–
- The first risk is the market is Unregulated. That means all the agreements are oral not written.
- Like- If the seller is denied to give the profit or something to the buyer the buyer can’t do anything. You can’t complain to SEBI.
- The price is not reliable. You have to go with the quoted price of the dealer.
- It can’t predict the fundamental growth of any stock.
How to trade in GMP?-
I do not recommend it. But if anyone wants to do it they can visit many websites available in the market.
I will also not take any website’s name, as we discussed before that there is no price reliability.
How is IPO GMP calculated?
As we discussed before the buyer offers an extra price to the seller to get the shares before listing in the stock exchange.
Is IPO grey market legal?
It is unregulated. It is neither in the black market nor in the white market.
It is an area between these two.
How is GMP decided?
It is based on the demand and the supply of the stock. If the subscription members are less than the number of shares offered in the IPO then the GMP will also be lower.
What is KOSTAK RATE in IPO?
It means the buyer is ready to buy the application from the seller before the share allotment.
How do I sell an IPO on the GREY market?
If you have a DEMAT account and you don’t want to subscribe for an IPO then you can sell your application to an interested buyer in the Grey Market Premium.