Relying on Grey Market Premium Wont Always Yield IPO Profits

Beyond Grey Market Premium: Strategies for IPO Profitability


The grey market, or dark market, is where commodities are sold unofficially through distribution channels not authorised by the original manufacturer or trademark proprietor. Examples of such markets include Gafar Market in Delhi and Heera Panna Market in Mumbai, where you can buy branded electronics and merchandise through unofficial channels.

Grey markets are not limited to clothes and electronics, even stocks are sold in grey markets. This is an unofficial market where you can buy shares of companies that have announced their Initial Public Offerings (IPOs) but are yet to be listed on the stock exchanges. It’s usual among IPO investors to make their investment decisions based on the grey market premium or GMP.

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But the question is “Does GMP guarantee listing gains in an IPO?” Continue reading to find out.

What is Grey Market Premium?

Shares are sold in the grey market through unofficial channels at a premium. The additional price a buyer needs to pay for buying IPO shares through the grey market is known as the grey market premium. 

The GMP can be used to predict the approximate price at which the shares of an IPO may get listed on the stock exchanges. For example, suppose a company has decided the issue price of its IPO shares as Rs. 65 and the current GMP is Rs. 35. It indicates that these shares can get listed on the stock exchanges at Rs. 100, providing nearly 54% gains to investors.

How does Grey Market Premium work?

GMP helps retail investors determine whether it’s safe to invest in an IPO, and if yes, then what could be the listing gains that they would make? Usually, the shares start to trade in the grey market as soon as the issuing company announces the issue dates for an IPO. However, the GMP does not remain fixed at all times before listing.

The value of the GMP may fluctuate daily based on the demand for a particular IPO’s shares in the grey market. Thus, as an investor, you must check the latest GMP when subscribing for an IPO to gauge an idea about the listing gains you can generate.

Is GMP a guarantee of profits?

It’s a common practice among IPO investors to make investment decisions based on the grey market premium. They look at the GMP to estimate approximate listing gains they can generate and subsequently decide whether to invest in an IPO. But is it a good thing to do so?

Let’s consider an example of Easy Trip Planners IPO to arrive at an answer to this question. The GMP indicated a listing price of around Rs. 310, about 70% higher than the issue price. The issue got oversubscribed by almost 160 times riding on all the hype around the GMP.

However, as it turned out, the shares got listed at Rs. 210 at a premium of only 12% over the issue price. So, those who might have invested in the IPO, imagining getting 70% gains, must have received a rude shock. Moreover, investors who paid a high premium to buy shares from the grey market suffered huge losses.

So, although the GMP is an indicator of the listing price of an IPO, it in no way guarantees the same. For most IPOs, the GMP has been somewhat reliable, but you must remember that it is subjected to high volatility that can change drastically within a day or two. Additionally, grey market data is always unofficial, although not illegal, that isn’t authorised by the Securities and Exchange Board of India (SEBI), stock exchanges, or stockbrokers.

The final word

The GMP can be one of the most crucial factors influencing your decision of whether to invest in an IPO. However, it should not be the lone factor in making an investment decision. Sometimes, the GMP of an IPO is very high during the book-building process but comes crashing down just before the listing. So, you should also look at the issuing company’s fundamentals, objectives for the issue, and the valuation of an IPO before subscribing to it. 

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