Many know about the black market, which typically involves illegal transactions outside the official economy. Most investors worry about the grey market premium and kostak price if any company announces the initial public offer.
Beginners are confused about these terms, so let us briefly discuss them. We have spoken quite a lot about this section in many articles related to IPO
What is GMP in IPO?
GMP in IPO stands for “Grey Market Premium” Shares are bought and sold in an unofficial market before being listed on a stock exchange. The Grey Market Premium is the unofficial price above the IPO issue price. It shows the demand and market price before the shares are listed.
It’s an OTC (Over The Counter) Market where IPO shares and applications of stocks are bought and sold. All transactions in this market are done via cash settlement. Remember one thing: It’s not regulated by SEBI or any other regulatory bodies in India. None of the stockbrokers were involved in or backed by the grey market transaction.
All transactions in the grey market are based on the trust built on the opposite party. If the counterparty fails to obligate the transaction, we can’t file the case in court.
We must understand that grey markets are unregulated, and trades are settled within a small group of trusted people. This allows merchant bankers and issuers to determine the company’s demand and supply. It will also give an idea of how investors see the company’s future potential.
Grey Market Terms:
We should be aware of two basic terminologies in the grey market.
- Grey market premium
- Kostak
Grey Market Premium:
Investors are willing to pay an additional amount over the IPO price to get the shares in the grey market. Let’s assume the issue price for stock X is Rs. 60.
If the grey market premium is traded at a 50% premium, that means people are ready to buy the shares of company X for Rs 90 (60 + 50% of 60). In the same way, some stocks would be traded at a discounted price.
Let us take one example: Ravi is a stock market trader who applies for the IPO shares of almost 500 in his trading account. Meanwhile, some of the other investors predict the value of the share is much higher than its issue price. These people are ready to pay higher than the issue price, and they approach grey market dealers to find the sellers of IPO shares.
For example, dealers contact Ravi to make the deal. If he doesn’t want to take a risk on listing day, he sells his shares to the buyers and books the profit.
IPO Applicant (Seller) ——–>Dealer———->Buyer
Kostak:
We can also trade the IPO application the same way as the grey market premium, but the difference is that applications are traded after the IPO application window closes. This is called the kostak price.
Let us understand: if you have a trading account and apply for the IPO, Later on, you don’t want to subscribe; in this case, you can sell your application to an interested buyer in the grey market who will take a risk. The profit you make is the kostak rate.
For example, you apply for the IPO for which you invested 100000 but don’t want to take the risk and sell it in the grey market at 10000 Rs for a single application. If the buyer is ready to accept the deal, he will pay 110000 to the seller.
You must be wondering, if a stock is listed at a 400% premium on listing day, the buyer will get the additional benefit of this investment. It’s not like buyers will get maximum profit in this transaction. They must pay the short-term capital gain tax (15% of the profit) and Kostak price.
Please have a look at our article on Biocon Share price Qualitative Analysis.
Key Takeaways:
- This gives a fair idea of the stocks’ demand and supply before they are exchanged.
- It reflects a small group of people, not a whole. This will not directly affect the IPO’s listing price.
- We can’t judge the exact demand for the stock in the grey market.
- It allows premium buying of demanded stocks and also gives an exit way for discounted stocks.
- We hope our readers get enough information about the topic. Before applying for an IPO, check the company’s fundamentals and analyze its financial parameters to predict its future potential.