What is Grey Market?

Grey markets in India have existed as a parallel market for stocks for a long time, and traders and investors verify their authenticity.

Let's us understand what is grey market meaning and how it functions.

What is Grey Market and How Does it Work?

A Grey Market, also called a parallel market, is an unofficial stock and applications market.

In this market, the investors trade for shares or applications before the shares are officially launched for trading on the stock exchange. Trading in grey market stocks in India is done in cash and in person.

No third-party firms, such as Stock Exchanges or SEBI back this transaction. Kostak and Grey Market Premium are the two well-known terms in the Initial Public Offering (IPO) Grey Market.

Understanding Grey Market in India

Grey markets play a demand and supply situation, and the traders and retail investors buy the shares before they get listed. 

If an individual wants to exit the IPO for any reason, the grey market offers a way out. Individuals can also buy IPO shares even after missing the deadline. 

A company can trade its stocks and applications in the grey market before getting listed. These markets also provide an opportunity for underwriters to understand the path of the company after getting listed.

What is Grey Market Stock?

A grey market stock is one where the company’s shares are offered and bid by traders unofficially. If a company presents its stock by way of traders before the shares are issued in an Initial Public Offering or IPO, it is considered Grey Market Stock. 

Generally, a small set of individuals runs the grey market stock, and the deals are based on the mutual trust of individuals. The trading done in the grey market stocks in India is legal and unofficial. The trades that have been carried out cannot be settled until the official trading commences.

What is Grey Market Premium?

The amount at which the IPO shares of the grey market are traded is known as the grey market premium. The company’s stock that will come up with the IPO is bought and sold outside the stock market. The live grey market premium reflects how the IPO will react on its listing day.

Here is an example-

Let’s assume that the issue price of Stock Y is Rs. 100. And the grey market premium is Rs. 300. This means that investors are ready to purchase the shares of Company Y for Rs.400 (100+300).

Note: The grey market premium of an IPO depends on its demand.

Types of Trading in Grey Market

There are two types of trading in the grey market-

• Trading, i.e., selling or buying the allocated IPO shares before they get listed in the stock exchanges.
  
  
• Trading, i.e., selling or buying IPO applications at a particular rate or premium.

How are IPO Shares Traded in the Grey Market?

The process of trading IPO shares in the grey market involves the following steps-

• The investors apply for the shares through IPO. It is a complete financial risk as the shares can sometimes be allocated below the issue price. These individuals are referred to as sellers.
  
  
• Some individuals find the value of shares greater than their issue price. They collect these shares before they get allocated via IPO allotment process. These individuals are referred to as buyers.
  
  
• To buy IPO shares, the buyers place the order at a certain premium via grey market dealers.
  
  
• The dealer then contacts the sellers who had applied for an IPO and asks them to sell their IPO stocks at a grey market premium.
  
  
• If the sellers don’t want to face the risk of stock market listing, they can sell the IPO shares to the grey market dealer at a fixed amount.
  
  
• After receiving the application details, the dealer sends a notification to the buyer about the shares he has purchased.
  
  
• If the shares get allocated to the seller, it is up to them to decide whether to sell at a certain price or transfer it to the buyer’s Demat account.
  
  
• The deal will automatically get cancelled if no shares are allocated to the seller.