What is the meaning of grey market with respect to IPOs, and why is it useful?

Understand grey markets in IPOs!

Grey Market IPOs

The stock markets have brought in several retail investors to the markets in the last 2 years. After the pandemic, retail has flooded the markets, and it is only the volatility in 2022 that has mellowed this interest by a bit. Retail investors find a lot of interest in IPOs because of the quick returns on listing. Also, many new-age companies are debuting on the stock markets, which gets the investors interested in the primary markets.

Grey markets, like the normal stock markets, function parallelly. Although grey markets are neither legal nor regulated, for IPOs, grey markets are becoming popular. Normal stock markets are regulated by SEBI. There is no regulator for the grey markets, and there are chances of fraud. So, the average investor should stay away from the grey markets. But it makes sense to check the price of IPOs in the grey markets as the trading starts on the grey market before the listing, and you can get an estimated listing price. Thus, you can decide whether to invest in the IPO for quick returns or not. 

Related: How IPOs differ from NFOs

Grey markets for IPOs

The grey markets for IPOs run through unregulated brokers or loosely regulated apps. When an IPO is offered to the public, the IPO is listed on the grey markets as well. Thus, one can track the prices on the grey markets and estimate the listing price. This can help the investors to take calls on short-term returns from the IPO, and they can apply accordingly. One thing to keep in mind is that the grey market price is not always close to the listing price. The listing price might be drastically different as the grey market trading is done only by a very small segment of the traders/investors. Some important terms of grey markets are given below:-

Related: All about IPOs in India

What is Kostak Rate?

In the grey markets, one can sell his/her application directly without knowing how many shares one is allotted. For example, you sell your application for Rs 1000, which is the Kostak rate. Now suppose you are not allocated any shares. You will still make Rs 1000. Suppose you are allocated the shares and make a Rs 5000 profit on listing day. You will get a profit of Rs 1000 only in this case, and you need to transfer the balance of Rs 4000 to the application buyer.

What is IPO grey market premium?

The IPO grey market premium is the extra price over and above the IPO issue price. For example, if the IPO is issued at Rs 85 and the IPO grey market premium price is Rs 15, then the expected listing price is Rs 100. Thus, with the IPO premium price, one can calculate the expected IPO listing price.

Related: How to check IPO allotment status

How IPO Grey Market Works

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