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IPO Grey market is an unofficial and informal market where the IPO shares are traded before they are officially listed on the stock exchange.
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IPO Grey market is an unofficial and informal market where the IPO shares are traded before they are officially listed on the stock exchange. IPO Grey Market is an unregulated and operated market, but its presence is important for every IPO as it gives potential investors an idea of the share market sentiment and demand for the IPO.
The premium price which an investor is willing to pay over and above the IPO issue price in the grey market is known as the Grey Market Premium. Kostak Rate or Subject to Sauda are the price at which IPO applications/lots are sold in Grey Market.
In this chapter, we will understand the basic concept of grey market trading and basic terms and strategies used in its dealing.
Grey Market Premium, commonly known as GMP, is the difference between the price at which IPO shares are traded in the grey market and the IPO issue price. For example, if the IPO issue price is Rs 850 and an investor is willing to pay an additional Rs 300 to get the IPO share. This means that the GMP of the IPO is Rs 300 per share.
IPO GMP helps predict listing prices. In the example above, investors anticipate a listing price of Rs 1,150 (IPO issue price plus GMP i.e 850 + 300). Although there is no guarantee that the IPO listing price will exactly match the GMP, the GMP is one of the most important indicators that generally help investors predict the IPO price and make an investment decision accordingly.
Grey market traders are unauthorized individuals who buy/sell IPO shares on an unofficial market (over-the-counter market). In certain cases, the grey market dealers are also required to underwrite a certain % of the IPO.
Since the IPO grey market is an unregulated and unofficial market, you cannot find registered traders. You need to check with local dealers to see if they operate in the grey market and can help you find buyers/sellers for your transactions. You can also try posting a message on the IPO Grey Market discussion page of InvestorGain.com to check for any buyer/seller or any discussion.
Trading in the IPO grey market begins with the announcement of the IPO issue price until the shares are listed on the exchange. The following are some of the key features of IPO grey market trading:
Grey market trading usually involves three parties: the buyer, the seller, and the dealer. Grey market trading takes place either through the trading of IPO shares or IPO applications.
To trade in the grey market, as a very first step, an investor needs to find a grey market dealer. Since the grey market dealing happens solely on trust, the dealer builds clientele through references. Thus, an investor can start trading in the grey market when he is referred to a dealer through a good and reliable contact.
Once an investor finds the dealer, he can place the order over phone call. The trading in the grey market starts as soon as there is any news of an IPO in the market till the previous day of listing. The settlement happens on the listing day at 9.45 am. Once the listing takes place, the grey market window for the said IPO gets closed. There is also a 90 day expiry period for the grey market trades. If an IPO does not take place within 90 days from the grey market transaction date, the deal gets cancelled.
On the listing date, the dealers punch in their buy/sell order as per their net delivery position at equilibrium price.
The accounting of the trades is done using excel sheets or simple Tally tools. On the settlement day, the angadia goes door-to-door to recover/deliver cash as the case may be.
In case of any default by either of the counterparty, there is nothing anyone can do. Thus, trading in grey market is risky.
The IPO GMP price can be positive or negative.
Example of GMP with listing gain
If the IPO issue price is Rs 500 and the GMP is Rs 300. It means that buyer A in the grey market is willing to purchase the share at Rs 800.
Suppose an IPO applicant i.e. seller B of IPO shares in the Grey market has 15 shares. He has submitted an application of Rs 7,500 (15*500).
The grey market buyer A will pay Rs 12,000 (15 * 800) against the IPO application value of Rs 7,500 (15 * 500).
Now let us say if the listing happens at Rs 1,200, the buyer and seller will earn below profits:
Example of GMP with listing loss
Continuing the above example, if the listing happens at Rs 600, the profit/loss for both parties will be as below :
As per the listing price of Rs 600, the application amount for 15 bids will be 15*600 = Rs 9,000.
Profit for seller B of the IPO shares: Rs 4,500 (12,000 - 7,500)
Loss for buyer A of the IPO shares: Rs 3,000 (9,000 - 12,000)
The amount of profit for the seller remains the same. However, the buyer incurs a loss of Rs 3,000 because the listing was below the GMP.
The IPO Kostak price is an agreed-upon price at which IPO applications are sold and purchased, regardless of their allotment status. The Kostak Price is the fixed price paid by the buyer of the IPO Application to the seller of the IPO Application.
The Kostak rate is the price for the entire IPO application and not per share. It is a price mutually agreed between the buyer and seller.
For example, an investor has applied for 15 shares at Rs 500 in an IPO amounting to Rs 7500. Now there is another investor who is bullish about this upcoming IPO and agrees to pay Rs 1,000 as the premium to purchase the entire IPO application. In this case, the seller of the IPO application secures a fixed profit of Rs 1,000 irrespective of whether he secures an allotment or not.
If the seller receives allotment and the listing happens at a premium, the seller is required to pass the listing gains to the buyer or credit the shares to the purchaser against Rs 8,500 (7,500 +1,000).
If the seller does not receive the allotment, still the buyer of the IPO application needs to pay Rs 1,000 to the seller of the IPO application.
Subject to Sauda price is an extension to the IPO Kostak rate. In subject to sauda, the buyer of the application agrees to pay a fixed price against the IPO application only if the seller of the IPO application receives allotment in the IPO. The subject-to-Sauda rates are generally higher than the Kostak rates.
Considering the above example, the buyer of the applicant agrees to pay an additional Rs 4,000 for the entire application provided the IPO applicant receives the allotment.
In this case, if the applicant secures no allotment, the deal gets cancelled. However, if the IPO applicant receives the allotment the buyer of the IPO application pays Rs 4,000 as the premium. The seller of the applicant either passes the listing gains to the seller or shares to the buyer of the IPO application for Rs 11,500 (7,500 + 4,000).
Note: Rs 7,500 is the amount for 15 shares bought at Rs 500. Rs 4000 is the premium buyer paid for the entire application.
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GMP (Grey Market Premium) |
Kostak |
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GMP is the amount at which the IPO share is traded in the IPO grey market. |
Kostak is an agreed price between the buyer and seller of the grey market. |
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GMP is per share. |
Kostak is for the entire lot or IPO application. |
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GMP fluctuates daily. |
Kostak is a fixed price between the buyer and the seller. |
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GMP is based on demand and supply shares. |
Kostak is based on mutual understanding. |
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Trades executed on a GMP basis will be cancelled if the IPO applicant does not receive an allocation. |
Trades executed on Kostak rate will not be cancelled even if the IPO applicant does not receive an allocation. |
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Example of GMP:
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Example of Kostak :
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GMP (Grey Market Premium) |
Listing Price |
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GMP is the price an investor is willing to pay above the IPO issue price in the IPO grey market. |
The listing price is the opening price of the shares on its first day of trading. |
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GMP is a term used in the IPO grey market/unregulated markets. |
Listing price is a term used in regulated markets. |
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Investors predict a listing price on the basis of GMP. |
The listing price is fixed by the issuer and merchant banker. |
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GMP changes on a daily basis from the day the IPO issue price is announced till the listing day. |
The listing price is announced on the listing day. |
Grey Market is beneficial if used in the right way. It is one of the indicators that help to predict the listing price. Grey Market can be used as an effective hedging tool and not for gambling. GMP is based on market sentiment and demand and supply of IPO shares and gives a fair idea of IPO listing.
Although the GMP is not always accurate, investors should keep an eye on the GMP as it can help them evaluate their investment decisions and the performance of an IPO on listing.
You can have a look at the IPO GMP live data or the IPO GMP performance tracker on Chittorgarh.com under the GMP tab of every IPO.
Note: Angadia is an age-old traditional form of courier service that deals in transfer of valuable items like cash, jewellery, etc. Generally angadias are used for money transfer services. They are the informal intermediaries who deal in cash. Angadias play a very important role in Grey Market which operates on a cash basis. It is a very risky service and is based purely on trust. Angadias offer door step delivery for cash pickup or delivery.
The IPO grey market is an unofficial, unregulated, over-the-counter market where trading in IPO shares/applications takes place before trading begins on the exchanges.
Investors who wish to trade IPOs prior to the subscription opening date or the listing date may do so in the grey market.
The grey market premium is the price at which the IPO shares are traded on the IPO grey market.
The grey market premium helps predict the IPO listing price and is commonly known as the GMP.
For example, the IPO issue price of XYZ Ltd. is Rs. 100-105 and the GMP is Rs. 60, which means that a grey market investor is willing to pay Rs 60 per share more than the issue price of Rs 100-105 and buy the IPO shares at Rs 160 to 165 rupees.
The GMP is based on the subscription level, demand and supply of IPO shares in conjunction with market sentiment.
There is no set method or formula for calculating the IPO grey market premium. In general, the grey market premium is higher when IPO demand is high and lower when IPO demand is lower. Sometimes the GMP is slightly lower even when subscription numbers are high because of negative news about the company or market sentiment.
No, the grey market premium is not accurate because it is based on the demand and supply of shares and on investor and market sentiment.
If the demand for the shares is higher, the GMP is higher, indicating that the IPO will do well when listed. However, if the demand for the IPO shares is low, the GMP is lower, indicating that the IPO may not do well after listing.
Investors can track the GMP, which can help them evaluate their investment decision, predict the IPO price and act accordingly. Although the GMP is not accurate and can be manipulated, investors can research and see the trends of the GMP and invest in IPOs to make profits.
The grey market premium is not always reliable, but if tracked correctly, can give an indication of the listing.
The grey market is a highly illiquid market and can be very volatile, so GMP should not be relied upon completely.
If the issue price of an IPO is Rs. 150 and its GMP is Rs. 80. It can be expected that the listing price of this IPO will be around Rs 230 (150 + 80). However, it is not certain that the issue price will be Rs. 230.
Refer to IPO GMP trends for every IPO on respective IPO pages on Chittorgarh.com for better assessment.
The grey market premium changes every day based on the demand of the stock.
The grey market begins on the day the IPO issue price is announced and is last updated prior to listing. The GMP assists in estimating the listing price.
Let us take an example to understand how the grey market premium works:
A company announces an IPO at a price of Rs 100 to 105 on 10th March. The IPO is scheduled to open on 13th March and close on 15th March and be listed on March 23.
Once the issue price is announced, trading begins in the grey market. GMP trends would look something like the following:
11th March : Rs 10
12th March : Rs 8 (-)
13th March : Rs 0 (-)
14th March : Rs 5 (+)
15th March : Rs 13 (+)
16th March : Rs 13 (No change)
17th March : Rs 12 (-)
18th March : Rs 15 (+)
19th March : Rs 11 (-)
20th March : Rs 13 (+)
21st March : Rs 16 (+)
22nd March : Rs 18 (+)
The above table shows the daily changes in GMP. The GMP is a reflection of the demand and supply of IPO shares and market sentiment. The (+) sign indicates that the GMP is higher than the previous day and the (-) sign indicates that the GMP has decreased compared to the previous day. The last GMP was updated on March 22 and is at Rs 18.
This means the listing of the IPO share is expected at Rs Rs 118 - Rs 123. Since the GMP is not very high, the stock is expected to perform average after listing. Although GMP numbers are not a sure estimate, they are an indicator of IPO performance.
GMP is a premium amount paid at which initial public offering (IPO) shares trade before they are listed on the exchanges.
The GMP can be positive or negative. A positive GMP indicates that an IPO may perform well after listing, while a negative GMP reflects the poor performance of the IPO. A stock with a higher GMP may list at a good premium, while a stock with a lower or negative GMP may list at a discount.
The Kostak rate in the IPO grey market is the fixed rate or price at which IPO applications are sold and bought regardless of their allotment status .
The Grey market premium Kostak rate is set by the mutual understanding of the seller and the buyer. The Kostak rate is the price for the entire lot or IPO application.
For example, if investor A has applied for 10 lots at Rs 100 and one lot consists of 15 shares, the total IPO application amount is Rs 15,000 (10 *15 * 100)
Now there is an investor B in the grey market who is willing to buy the entire application at a premium of Rs 2,000. This Rs 2,000 is a sure profit for investor A, regardless of the allocation status.
If Investor A receives the full allotment and the listing is at Rs 150, Investor A will receive only Rs 2,000 and must pass on the listing gains to Investor B.
Thus, investor B makes a profit of Rs 5,500 against Rs 2,000 paid as Kostak. Alternatively, investor B can also receive a credit of shares by paying Rs 17,000 ( application amount + Kostak)
If investor A does not receive the allotment, he will still receive Rs 2000 from investor B.
You can check the grey market premium of IPOs on Chittorgarh.com under the GMP tab for each IPO.
The grey market premium gets updated until the listing happens.
The GMP price is the price at which IPO shares are sold and bought on the grey market.
If the grey market premium is Rs 80 and the issue price is Rs 100, the grey market price is Rs 180, and buyers and sellers trade at this price or can manipulate it.
You can check grey market premium prices on various websites that store information from different sources. There is no regulated or authorized source to obtain this data.
One of the websites that can help you with the GMP prices of the upcoming IPOs is Chittorgarh.com. You can find out the GMP price by following the steps below:
IPO applications are sold on the grey market with the help of local dealers. IPO applications are sold at Kostak Rate or Subject to Sauda price.
Trading on the grey market is done either by trading IPO shares or by trading IPO applications.
Trading in IPO shares is done at the GMP. Let us take an example to understand this. If the IPO issue price is Rs 150 and the GMP is Rs 80, the grey market buyer is willing to pay Rs 230 per share to the seller of the IPO shares. However, if the seller does not receive any shares at the allotment, the deal is cancelled.
IPO applications are traded at Kostak Rate or Subject to Sauda price. If an investor has applied for 100 shares at Rs 150, the value of the IPO application is Rs 15,000. In the grey market, there is an investor who is very interested in the said share and is willing to pay Rs 1,000 as Kostak to buy the entire IPO application. After the commitment, the buyer has to pay Rs 1,000 to the seller irrespective of the allotment. If the seller receives the allotment, he has to pay the listing gains/losses of Rs 1,000 to the buyer or transfer the shares for Rs 1,000 of the IPO application amount.
In the Kostak rate, there is a risk of allotment as the buyer needs to pay the Kostak rate even when the seller does not receive the allotment. So, to secure the risk to some extent comes subject to sauda in the picture wherein the deal is not done until the seller of the IPO application is allotted/receives shares. However, the price of subject to sauda is higher than that of Kostak rates.
Each time a seller and a buyer exchange an IPO application, any associated gain or loss is transferred to the buyer.
The grey market premium in an IPO is calculated based on the supply and demand for the shares. If the demand for an IPO is high, the GMP can be set higher and vice versa. For example, if the issue price of an IPO is Rs 100 and the demand for the IPO is very high, the GMP could be set at Rs. 198, which means that investors are willing to buy the shares of the IPO for Rs 298.
The grey market premium is also largely influenced by market sentiment and is sometimes manipulated.
The GMP price in an IPO is the price at which the IPO shares are traded on the grey market.
It is the premium an investor is willing to pay to buy the IPO shares before listing. The GMP is quoted per share. The GMP price changes daily from the day the issue price is announced and is last updated one day before the listing day. The GMP price helps to predict the listing price.
The GMP is the price an investor is willing to pay over and above the issue price of the IPO on a per share basis and the Kostak rate is a fixed price an investor is ready to pay over and above the IPO application amount for buying the entire IPO application.
The GMP fluctuates depending on the supply and demand for shares, while the Kostak price remains fixed once agreed upon by the buyer and seller.
The buyer must pay the Kostak rate even if the seller of the IPO application does not receive an allotment in an IPO.
The sauda rate in an IPO is a fixed premium that an investor is willing to pay to the seller of the IPO if the IPO applicant receives the allotment.
The sauda rate is commonly known as "subject to sauda" and is a common term in the grey market for IPOs. The sauda rate is quoted for the entire IPO application.
For example, an investor agrees to pay Rs 4,000 to the seller of the IPO application who has applied for 100 shares at Rs 150. If the applicant receives the allotment, he is required to remit listing gains/losses to the buyer of the IPO application against Rs 4,000 . However, if the IPO applicant does not receive the allotment of shares, the transaction will be cancelled.
The full form of GMP in lPO means grey market premium in the IPO. GMP is the price that investors are willing to pay above the issue price.
Generally, the GMP is positive, but sometimes it can be negative, indicating that investors are not interested in investing in the IPO and that the stock may be trading at a discount and not doing well after listing.
The GMP helps predict the stock listing price. Although the GMP is not always accurate or reliable, it can give an indication of the listing price and issue performance.
The grey market premium is a function of the demand and supply of IPO shares and market sentiment.
If investors are optimistic about the IPO, the grey market premium is on an upward trend. However, if investors are not completely sure of the company's prospectus and have doubts, the GMP is generally low or negative.
Trading of IPO shares with GMP begins in the IPO grey market as soon as the issue price is announced. The last GMP is updated one day before the listing date. There is sufficient time between the announcement of the issue price and the listing date to track the GMP, which can help predict the listing price and support investment decisions.
One should not blindly rely on GMP trends but can use them as an indicator in conjunction with other factors such as company prospects, objects, demand, etc.
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