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IPO FAQs » IPO Grey Market FAQ's

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IPO Frequently Asked Question(s) provide answers to commonly asked questions about IPO’s in Indian Stock Market. This IPO FAQ Category helps IPO investors for their better understanding of IPO’s and to resolve their quires.

We welcome you for your comments to improve answers of the questions asked in this category. Please feel free to post comments. We appreciate your participation in building this page simple, easy to understand, relevant and correct information provider to the Indian Investor Community.

If you don't find answer of your question, do not hesitate to ask our expert team by clicking 'Ask your question' link on the top of this page.

<< Check out all FAQ's about IPO's

1

What is Grey market?

IPO Grey market is an unofficial market where IPO shares are bought and sold before they become officially available for trading on the stock exchange.

IPO Grey Market is an over-the-counter market where dealers may execute orders for preferred customers as well as provide support for a new issue before it is actually issued.

Grey market trading include trading (selling or buying) applications at certain amount and trading (selling or buying)  allocated shares through IPO allotment before they list on stock exchanges.

Grey market trading is usually done among the small set of people who trust each other as there is no official platform or rules define for these trading.

Two popular terms used in IPO grey market are ‘Grey Market Premium' and ‘ Kostak'.

1. Grey market premium (or grey market price) is a premium amount in rupees at which IPO shares are being traded in Grey Market before they get listed in stock exchange. Grey market premium can be in positive or in negative based on demand and supply of the stock.

Grey Market Premiums are also attached with words ‘Buyer' or ‘Seller'. They tell the price either at which buyers are willing to buy shares or the price at which sellers are willing to sell their IPO shares.

Example:
Mundra Port and SEZ Limited
Issue Price: Rs 440 per equity share
Grey Market Premium: Rs 400 (Buyers)

This means buyers are ready to buy Mundra Port shares at 440+400 = Rs 840.

SVPCL Limited
Issue Price: Rs 45 per equity share
Grey Market Premium: Rs -6 (Seller)

This means sellers are ready to sell SVPCL shares at the discount of Rs 6. i.e. 45-6 = Rs 39.

2. Kostak (or price of application) is the premium amount in rupees at which IPO applications are being traded in IPO Grey Market. Usually ‘Kostak' value is defined as the premium of a maximum lot retail application in an IPO.

Kostak price is important mostly before issue is close for subscription and final bidding status is available to the IPO investors. Very few IPOs applications are traded after final bidding status is available to the investors.

‘Kostak' is especially for people who do not want to take risk with IPO allotment or listing gains.

Example:
BGR Energy Limited
Issue Price: Rs 480 Per Equity Share (at upper band)
Lot Size: 14
Grey Market Premium: Rs 350 to Rs 360
Kostak (Rs 100000): Rs 2500 to Rs 2600

This means BGR applications of Rs 1 lakhs are being traded in IPO Grey Market at Rs 2500 to Rs 2600.

Even though the Grey Market Premium of this IPO is around 75% of the issue price, the ‘Kostak' is just 5% of the application amount. This is because Grey Market traders are assuming that the issue will highly oversubscribe and there will not be firm allotment even for retail investors who will apply full Rs 1 lakhs. They are assuming one out of two people will get allotment and thus Rs 2 lakh investment will give them approximate Rs 5000 return. This way they are ready to buy 1 lakh application for Rs 2500.

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2

Who decides the grey market price?

Just like stock market or commodity market trading, IPO Grey Market Premiums are decided on basis of demand and supply.

If there are more buyers then sellers the price goes up and visa versa.
 
Please note that there are no regulatory bodies involve in Grey Market Trading and therefore there are no limitations on price momentum. Grey market premium may rise or fall suddenly. Off course there are no circuit filters in place.

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3

How can I buy and sell in Grey market?

As it's over the counter market, there are no official people or business you can approach for IPO Grey Market trading.

If you are interested in buying or selling IPO stocks in Grey Market, you have to find a local dealer who can find buyers or sellers for you.

Grey market trading is mainly active in few cities including most of the cities in Gujrat, Mumbai, Delhi, Jaipur etc. 

    6 Comment(s) - Read / Post Comments  
 

4

How Grey Market works?

Option 1: Trading IPO Allocated Shares in Grey Market:



  • Investor applies for shares through an IPO. They take a financial risk as there are chances that they may not get allocated any share or they receive the shares but shares may list below the issue price. Let's call them ‘Sellers'.
  • There are few other people in the market who think that the share values more then its issue price. They start collecting these shares even before they are allocated by the issue registrar through IPO allotment process or before shares are in the stock market legally for sell through stock exchanges. Let's call then ‘Buyers'.
  • Buyers contact the grey market dealers and place the order to buy IPO share at certain premium.
  • The grey market dealer contact sellers who applied in the IPO and ask them if they are willing to sell their IPO shares (if they receive allotment) at certain premium at this time.
  • If the sellers like the premium and they are not willing to take risk of stock market listing, they may sell the IPO shares to the grey market dealer and book the profit. At this time the seller has to finalize the deal with the grey market dealer at a certain price.
  • Grey market dealer get the application detail from seller and send a notification to the buyer that he bought a certain number of shares from the sellers in grey market.
  • Allotment is done and sellers may or may not receive allotment of shares.
  • If shares are allocated to the investor, either he may get call from the dealer to sell them at certain price or to transfer allocated shares to some demat account.
  • In case of selling the shares, settlement is done based on the profit or loss and the grey market premium at which buyers and sellers made a deal.
  • If no shares are allocated to the sellers the deal get canceled without any settlement.

Option 2: Kostak - Trading IPO Applications in Grey Market:



  • Investor applies for shares through an IPO. They take a financial risk as there are chances that they may not get allocated any share or they receive the shares but shares may list below the issue price. Let's call them ‘Sellers'.
  • There are few other people in the market who think that the share values more then its issue price. They start collecting these shares through grey market dealers much before the shares are even allocated. Let's call then ‘Buyers'.
  • Buyers decide the price of the application based in various assumptions and market conditions. They give an offer to the sellers that they are willing to buy an IPO Application (without knowing that how many shares will get allocated) at certain premium.
  • To avoid the risk of allocation seller may sell their application at certain premium to the buyer through grey market dealer.
  • This kind of trading is call application trading or ‘kostak'. In case of ‘Kostak' seller need not to worry about the share allotment in IPO. He receives the allotment or not he will get the premium at which he sold his IPO allocation.
  • Grey market dealer get the application detail from seller and send a notification to the buyer that he bought an IPO application at certain premium from the sellers in grey market.
  • Allotment is done by the issue registrar. The application seller sold may or may not receive allotment of shares.
  • If shares are allocated to the sold application, either seller may get call from the dealer to sell them at certain price or to transfer allocated shares to some demat account.
  • In case of selling the shares, settlement is done based on the profit or loss.
  • If no shares are allocated to the sellers the deal is over without any settlement. The seller still gets his premium as he sold his application.

    3 Comment(s) - Read / Post Comments  
 

5

Is Grey market driven by any legal authority?

No, it's an unofficial over-the-counter market. Trades are made by Grey Market Dealers on personal basis.

    0 Comment(s) - Read / Post Comments  
 

6

How come the grey market prices changes every day?

Grey market premiums moves like listed stock prices. Ultimately it's based on demand and supply. More buyers then sellers will pull up the grey market premiums, while more sellers then buyers could pull it down.

Many things change when a company announces an IPO to the IPO listing day. Thus the grey market premium keeps changing every day, every hour.

Short selling is also done in grey market if investors think that stock price will go down after listing.

Note: As no regulatory body involve in grey market deals and no circuit filters in place, grey market premiums may go up or down drastically in case of any positive or negative news flow.

    1 Comment(s) - Read / Post Comments  
 

7

Should IPO investors consider Grey Market Premium before applying in an IPO?

Investor could consider grey market premium as one of the parameter before applying for IPO Stocks. Please note that good grey market premium doesn't guarantee for listing gain or long term gains. Grey market premiums may change in the duration when you apply for an IPO and when the issue gets listed.

An IPO investor should consider various factors before applying in an IPO including company financials, business model, promoters, Issue size, upcoming projects or investment plans etc.

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8

Can we sell the stock allotted to us in an IPO before the stock gets listed?

No, you can not place the buy/sell order for shares which are not yet listed in stock exchange. Shares can only be traded after they get listed on stock exchange.

Remember that this is not the case in grey market or over the counter trades. Share holders can trader shares on personal basis before they get listed in stock exchanges. As stock exchanges are not involved in these deals, they are not responsible for any failure in the deal.

    8 Comment(s) - Read / Post Comments  
 

9

When a stock is not listed how the broker does executes order for preferred customers as for grey market?

Be the first to answer this question.

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10

From where I can know the present rates of premium on a share in IPO grey market ?

Be the first to answer this question.

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