How does grey market premium work?

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.

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