What is GMP and how does it affect IPO listings | Motilal Oswal

GMP and the effects of IPO Listings

The premium which is paid by investors over the issue price is known as the Grey Market Premium (GMP). The issue price can be defined as the amount at which the shares are to be made accessible for purchase before they are formally listed on the stock exchange.

The IPO grey market has a high grey market premium. The IPO grey market is basically an unofficial market in which IPO applications or shares can be bought and sold prior to them being officially traded on the stock exchange.

How Does The GMP Impact The IPO Listings?

Depending on whether it is negative or positive, the grey market premium helps measure investor interest in a specific IPO. 

The grey market premium for an IPO, similar to stock prices, is determined by the stock's demand and supply. The GMP will be lower if the number of subscriptions for a given IPO is smaller than the number of shares offered in the IPO. The GMP, on the other hand, will be larger if the number of subscribers exceeds the number of shares offered in the IPO.

How Are The Trades Settled?

You might also match transactions with a specific counterparty with whom you have struck an off-market contract when the total market volumes were low.

However, with the market currently being extremely liquid, matching trades with your preferred counterparty is difficult. So grey market trades are resolved in cash, with the pre-open price determined through what is known as the call auction process.

How is GMP relevant?

  • GMP is a very good determinant of whether or not an IPO will do well or not, according to retail investors.
  • The Kostak rate is the price at which you could sell off an IPO application for a predetermined price, regardless of whether you gain allocation or not.
  • The GMP is what determines the degree of interest in an IPO among investors. 
  • However, there cannot be any guarantee that the Grey Market Premium will accurately predict the listing price. However, it is one of the tools to verify before investing in an IPO.

The trades are honoured in the vast majority of situations, which is the reason why the grey market remains well functioning today. 

To Conclude

Since it happens to be a fair measure of IPO demand, the GMP might be considered a signalling device. However, due to the nature of the grey market, there is a chance that the GMP will be manipulated.

Related articles: 5 Tips for Investing In IPOs | What's the big deal about IPOs | Clearing the confusion from IPOs | IPO in India- The future looks bright

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