When an initial public offering (IPO) is launched, investors look for ways to make profits. One such way is the IPO grey market, which allows people to buy or sell shares of a company even before the official listing on the stock exchange. In this blog, we will explain what the IPO grey market is, how it works, and why it is important for investors who are looking to make smarter investment decisions in the world of IPOs.
Introduction
An IPO (Initial Public Offering) is when a company decides to sell its shares to the public for the first time. This gives investors a chance to buy shares in the company. However, sometimes, investors don’t want to wait until the shares are officially listed on the stock exchange to start buying and selling. That’s where the IPO grey market comes in. The grey market is an unofficial market where investors can trade IPO shares even before the company gets listed. In the grey market, the prices of IPO shares are determined by demand and supply, and these prices can give clues about how the IPO will perform once it is listed.
How Does an IPO Grey Market Work?
The IPO grey market works by allowing investors to buy and sell IPO shares before they are officially listed on the stock exchange. For example, if a company is about to launch an IPO, some investors in the grey market will be willing to buy the IPO shares even though they cannot own them until the company gets listed. The price of the IPO shares in the grey market is determined by how many people want to buy and sell them. If many investors want to buy shares in a particular IPO, the price in the grey market will go up. If there is less interest, the price will go down.
Understanding the Grey Market in India
In India, the grey market is an informal market where IPO shares are traded. It is not regulated by the government or any official stock exchange, which means that there is no guarantee or protection for investors who trade in the grey market. The grey market operates through middlemen or brokers who connect buyers and sellers of IPO shares. While trading in the grey market can give investors an idea of how the IPO might perform after listing, it is important to understand that these trades come with risks.
Types of Grey Market Trading
Two main types of trading happen in the IPO grey market:
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Trading of IPO Shares: This is where investors buy and sell shares of a company that has announced an IPO but has not yet been listed on the stock exchange. These trades happen before the listing, based on the expected price of the shares.
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Trading of IPO Applications: This involves buying and selling the application forms for the IPO itself. In this case, investors are buying the chance to apply for shares in the upcoming IPO, not the actual shares themselves. This happens when the IPO is expected to be oversubscribed, and investors want to secure a place in the IPO by buying someone else's application.
What Is KOSTAK?
KOSTAK is a term used in the IPO grey market to refer to the premium or price that an investor is willing to pay to secure an application for an IPO. For example, if an investor has an application to apply for an IPO, they can sell that application to someone else for a price, and this price is called the KOSTAK price. The KOSTAK price usually reflects the expected demand for the IPO shares. The higher the demand, the higher the KOSTAK price.
What Is Subject to Sauda?
Subject to Sauda is another term used in the IPO grey market. It means that a transaction has been agreed upon, but the actual trade will only be completed after the IPO shares are officially listed on the stock exchange. When an investor buys shares in the grey market "subject to sauda," they are agreeing to buy the shares at a certain price once the company’s IPO is listed, but the actual exchange of money and shares will happen later.
Why People Trade in Grey Markets
There are several reasons why investors might want to trade in the IPO grey market:
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Early Profit Opportunities: Investors can make quick profits by buying shares at a lower price in the grey market and selling them at a higher price once the IPO is listed.
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Limited Supply: Sometimes, IPO shares are oversubscribed, meaning that there are more people wanting to buy shares than there are shares available. Investors might trade in the grey market to secure their place in the IPO.
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Price Movements: The grey market price can give investors an idea of how the IPO might perform once it is listed, helping them make more informed decisions.
Different Ways IPO Shares Are Traded in the Grey Market
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Cash Deal: In this type of deal, the buyer pays the seller in cash immediately in exchange for IPO shares. This is the simplest type of trade.
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Delivery Deal: This is where the seller agrees to deliver the IPO shares on the listing day, and the buyer pays the agreed amount upfront. The buyer receives the shares once they are officially listed.
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Subject to Sauda: As explained earlier, this type of deal happens when an investor agrees to buy or sell the IPO shares once the shares are listed.
Why Companies Allow Grey Market Trading
Companies don’t directly allow grey market trading, but the demand for IPO shares in the grey market can provide some benefits:
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Investor Interest: High demand for shares in the grey market can show that investors are excited about the IPO, which can generate interest in the stock once it is listed.
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Price Discovery: The grey market helps in the price discovery of the IPO shares. It gives an early indication of what the market might expect when the stock is listed.
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Increased Market Buzz: A successful grey market debut can generate positive buzz about the company’s IPO, helping the stock perform well once it’s officially listed.
How Are Grey Market Trades Settled?
Grey market trades are typically settled when the IPO shares are officially listed on the stock exchange. Once the stock is listed, the buyer and seller exchange money and shares. If the shares perform well, the buyer may make a profit, and if the shares don’t do well, the buyer may face a loss. The grey market is based on trust and is not legally regulated, so investors need to be careful before trading in this market.
The IPO grey market is an important and exciting part of the stock market for many traders and investors. It allows people to trade IPO shares before they are officially listed, providing opportunities for early profits and price discovery. However, because the grey market is not regulated, it comes with risks. It’s essential for investors to understand how it works and to proceed with caution when trading in the grey market.
Further reads: What happens to your money once you bid for an IPO | How to buy an IPO in India? | How to apply for an IPO?