Home/Article/Why do people observe the Gray Market Premium before investing in an IPO

Why do people observe the Gray Market Premium before investing in an IPO

13 Sep 2023

Black and white are two ends of the same paradigm for many people living in this colorful world, with black representing all that is wrong and white representing all that is pure and correct. However, once you leave the fictional realm, "just" Black or White life is unthinkable. As a result, we eventually choose the gray road, which is the middle ground.

The stock market, too, has many colors, such as black, white, green, red, and even gray. The meaning, however, is completely different in this circumstance. Let's take a closer look at the gray market, GMP, and how it works.

  • What is the Gray Market IPO Listing?

In the gray market, individuals buy and sell IPO shares before they are formally introduced for trading on the stock exchange. There are no restrictions in place because it is an unofficial over-the-counter market. All transactions are carried out in cash and on a one-on-one basis. No third-party entities, such as SEBI, the Stock Exchange, or brokers, are backing or supporting this transaction. Because there is no official platform or set of rules for gray market trade, it is done by a small group of people. 'Gray Market Premium' and 'Kostak' are two prevalent words in the IPO gray market.

  • What is GMP?

The gray market premium (GPM) is the price at which gray market IPO shares are sold before they are listed on the stock exchange. Simply put, the stock of the company that issued the initial public offering (IPO) is bought and sold outside of the stock market.

The GMP predicts how the IPO will perform on its first day of trading. For example, if a business issues an IPO for Rs.100 and the gray market premium is around Rs.20, we can expect the IPO to list at roughly Rs.120 on the first day of trading. There is no guarantee of accuracy, but in the vast majority of cases, the GMP is correct and the IPO is listed at the provided price.

  • What is Kostak Rate?

The Kostak rate is the amount paid by an individual for an IPO application before it is listed on the stock exchange. One can fix their profit by buying and selling their entire IPO application on Kostak rates outside of the market. The Kostak tariffs apply regardless of how you receive your allotment.

  • How is Gray Market a Part of IPO Listing?

The gray market is an unofficial market, whereas the IPO market is a SEBI-regulated and recognised channel for raising capital in the market. There is no official link between the IPO market and the IPO gray market.

  • How does the Gray Market Work?

There are two ways to make money in the gray market. The first option is to buy and sell IPO shares in the gray market before they are publicly traded. The second option is to sell your initial public offering application for a certain price. Stay updated on the latest Upcoming IPO 2023!

Frequently Asked Questions (FAQs)

1. When I sell an application on the gray market, do I have to pay taxes?

Yes, the seller must pay a short-term capital gain tax on the profit he gained by selling stock in the stock market.

2. What are my options for buying and selling in the Gray market?

Individuals can choose their own buyers/sellers on a personal basis because the gray market has no regulatory authority.

3. What factors influence the price of an IPO on the gray market?

The demand and supply statistics, similar to stock prices, determine the Gray market price for an IPO. The gray market price will be lower if the subscription for a specific IPO is less than the reported shares, and higher if the converse is true.

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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