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How Grey market works in Stock market?

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Grey Market is the market where Investor can sell his IPO Bid at Kostak Price. 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.

Grey Market Premium (GMP) is the premium expected at which IPO can be get listed.

In Grey market transaction 2 parties are involved.

  • Seller of Bid (S)
  • Buyer of Bid (B)

Those Investors who sold their bid at kostak price have no risk now. He would be given the predetermined amount whether he will be alloted shares or not.

Risk takers buy these bids at Kostak Price. They would earn money if the share got listed at Premium above the GMP.

Let's take an example of RBL bank

  • Issue price: Rs 225
  • Lot size: 65 Shares
  • Kostak: Rs 700
  • GMP: Rs 40

So if you sold your bid to buyer he would have to pay you Rs. 700.

Now Share got listed at Rs. 300 which is Rs. 75 Premium over the issue price of Rs. 225.  Suppose you got allotment. So you will sell your shares at listed price or above it. So the Capital Gain to your account is Rs. 75(300-225)*65 Shares = Rs. 4,875. But as decided you can have only 700, so the Balance is the profit of buyer for taking the risk. You have to pay him Rs. 4175. But if you didn't get the allotment, he will pay you 700.

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