What is an IPO Grey Market?
The IPO grey market is a type of unofficial market where shares of a company that is about to go public are traded on speculative basis before being listed on the official stock exchange. In this IPO market, investors can buy and sell application forms of an IPO and negotiate the price based on their anticipation of the IPO’s demand and potential listing price.
IPO grey market is not regulated by any official securities regulatory bodies which makes transactions based purely on trust between the parties involved. The prices in the grey market provide early indications of the IPO’s potential performance, but they are not guaranteed to reflect the actual listing price.
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Features of IPO Grey Market
An IPO grey market has the following features:
- It is an informal market without regulations.
- Most of the trading in the IPO grey market occurs over phone calls.
- Trades typically settle in cash.
- Deals are mostly fulfilled based on mutual trust between parties.
- The grey market operates non-stop for 24 hours a day, 7 days a week.
- No official authority oversees IPO grey market activities.
- Dealers are not officially registered or recognized.
- Transactions do not have any formal contractual documentation.
Is it Legal in India?
- Grey Area: The IPO grey market is not supervised by SEBI or any other regulatory body. However, it is not strictly illegal.
- No official support: There is no official support in case any issues arise in the grey market.
- Seek expert advice: Experts recommend thorough research before venturing into this market space.
Who trades in this market?
In the IPO grey market, the dealers are typically informal traders or brokers who are not officially recognized or regulated by securities regulatory bodies. These dealers can be:
- Individual Brokers: These are individuals who have a network of clients and act as intermediaries to facilitate the buying and selling of IPO shares or applications before the official listing.
- Small to Medium-sized Financial Entities: Some financial entities, not necessarily affiliated with major stock exchanges, might engage in grey market activities due to their connections with high-net-worth individuals or institutional investors.
- Investors with Inside Information: Sometimes, individuals with inside information or insights about a particular IPO’s potential performance might act as dealers, leveraging their knowledge to negotiate prices.
- Networked Groups: Informal groups or networks of traders who have established trust among themselves and operate based on mutual agreements.
How to trade in Grey Market?
Here is a step-by-step way to trade in this market:
- Research and Network: Start by networking with traders who are active in the grey market. This could be through personal contacts, online forums, or financial communities.
- Understand IPO grey market premium (GMP): The premium indicates the potential performance of an IPO before its official listing. A high grey premium suggests strong demand and positive sentiment for the IPO. It indicates that investors expect the shares to list at a price significantly higher than the issue price. A low or negative grey premium might suggest a pessimistic sentiment about the IPO’s performance post-listing.
- Kostak Rate: Kostak rate is a term that is only used in the Indian IPO grey market. It refers to the rate at which IPO applications are bought and sold. If you are not interested in the IPO but want to sell your application at a profit, the Kostak rate is the price you’d get.
- Agree on Terms: Since the grey market is unregulated, all transactions are based on mutual trust. Ensure you have a clear agreement with the other party about the terms of the trade, including the price, quantity, and payment method.
- Payment and Transfer: Payment methods can vary, but they’re usually done through bank transfers, cheques, or cash. Once payment is settled, the shares or application forms are transferred to the buyer.
- Risks: Be aware of the risks involved. Since it is an unofficial market, there is no legal recourse in case of disputes. It is also possible that the actual listing price of the IPO differs from the grey market expectations, leading to potential losses.
- Stay Updated: The grey market is highly dynamic, with prices changing based on demand, news, and other factors.
- Exit Strategy: Decide in advance your strategy for when the shares are officially listed on the stock exchange.
IPO Grey Market Premium (2022-2023)
In the year 2022-23, this was the IPO GMP. For checking IPO grey market premium today, you can check the financial websites.
What are the benefits of trading in this market?
The following are the benefits of trading in this market:
- Early Price Indication: This market provides an early indication of the demand and potential listing price of an IPO. If there’s a significant premium in the grey market, it might suggest strong demand and a potentially higher listing price on the official stock exchange.
- Potential Profits: Traders can capitalize on the difference between the IPO price and the expected listing price. If their speculations are accurate, they can secure shares at a lower cost in the market and sell them at higher prices once the IPO is officially listed.
- Liquidity Before Listing: Investors who have applied for an IPO but wish to exit before the official listing can sell their application forms or allotment rights in the market, providing them with liquidity.
- Kostak Rate Earnings: In markets like India, the “Kostak rate” allows individuals to sell their IPO application forms at a fixed rate, regardless of whether they receive an allotment. This provides an opportunity to earn a fixed amount without bearing the risk of the IPO’s actual performance.
- Speculative Opportunities: For those who enjoy speculative trading, the grey market offers a platform to make short-term decisions based on anticipated demand and listing prices.
- Access to Oversubscribed IPOs: In cases where an IPO is highly oversubscribed and the chances of allotment are low, interested investors might turn to the grey market to secure shares, albeit at a premium.
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FAQs
What is Subject to Sauda?
Subject to Sauda is a term commonly used in the Indian IPO grey market. It means that the deal or agreement or sauda is conditional and will be finalized only when certain conditions are met.
Do sellers of IPO applications in grey market need to pay taxes?
Sellers trading IPO applications in the grey market are obligated to pay a short-term capital gains tax on the profits from shares sold. The applicable tax rate is 15%, with an additional charge for education and higher education cess.
Are there any risks associated with the grey market?
Yes, due to its unregulated nature, there's a risk of fraud, and there's no legal recourse in case of disputes.
How does the grey market premium affect the actual listing price?
While the GMP provides an early indication, the actual listing price can vary based on various factors.
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