We, humans, love to color code things, don’t we? White- and blue-collared workers, yellow slips, black Friday sales… oh, we can go on. This article is another color-coded word in the world of finance: the Grey Market.
What is the grey market?
The Grey Market has a more popular name: Black Market. They are parallel or unofficial marketplaces. IPOs are made available on them for purchase before their formal launch for exchange on the stocks. Since they are unregulated markets, there are no constraints around them. Every single transaction is made with cash. Aside from the stock exchange, brokers, and SEBI, no other organizations support this transaction.
A small number of people engage in such operations on the grey market. In India, such market are unregulated.
Benefits of the grey market
The unregulated market comes with its share of benefits. To name two:
- Even before the IPO’s listing, this type of market lets investors withdraw funds. Investors may, therefore, profit from price changes before the listing.
- Before the company goes public, this market ensures that the issuer and the underwriter receive an expected share price and valuation.
The drawbacks of the grey market
In an IPO market of this kind, price forecasts based on the premium are usually not accurate. It may be influenced by additional institutional investor subscriptions.
The estimations don’t necessarily reflect reality because there are so few participants in the IPO black market.
What are grey market stocks?
A company’s equity is referred to as grey market stock if it is offered to traders before the shares are released via an IPO. So with grey market stocks, the traders make unofficial offers and proposals on the firm’s shares.
This type of stock is often controlled by a limited group of people. The transactions often depend on personal-self-assurance. In many jurisdictions like India, such stock purchases are unauthorized or illegal.
Grey market premium
For shares sold in this type of market before listing, buyers offer a higher price than in the IPO. This is the Grey Market Premium (GMP).
However, the shares of every firm do not fetch a premium in the black market. The shares may even trade at a discount if the response to the IPO is likely to be lukewarm. Some investors use the GMP as a guide to determine the listing price and estimate the reception the IPO is likely to receive. However, because the black market is prone to manipulation, GMPs might not always be reliable.
Types of trading in the grey market
There are mainly two types of trading in this kind of market:
- Purchasing or selling the allotted IPO shares before their listing on stock markets, and
- Offering or purchasing IPO applications at a set price or premium.
How are IPO shares traded in the grey market?
While this kind of market is unregulated and unsafe, you may wish to understand how it works. Here is an account of the steps trading in this market involves.
- The trader must qualify for an Indian IPO and apply to participate. There are dealers who sell such IPO applications on the black market. Those interested in purchasing an IPO application must bid for it.
- If the seller’s petition is approved, they must transfer all of the shares to the buyer.
- After the shares have been allocated, the seller is not permitted to keep the profit. The buyer also bears the loss on the occasion of a loss or reduced listing.
- The seller still benefits from the GMP they have obtained even if the IPO is not allotted to them.
Whom should you contact to trade in the grey market?
Trading in an unregulated market sometimes takes place through phone conversations because it is an informal market. There is no officially registered individual or merchant that you can reach out to. You would, however, need to find a local dealer who helps connect buyers and sellers.
Conclusion
The black market continues to be a significant parallel market for those conducting unregulated trading. It frequently provides direction on potential listing locations. Therefore, market players closely monitor it. Any transaction or offer made on the black market is not subject to regulatory clearance.
FAQs
What determines the IPO grey market pricing?
As it is with stock pricing, the supply and demand figures determine the grey market price of an IPO. The price in the black market will be lower if the subscription is less than the testified shares and higher if the opposite is true.
How can I make purchases and sales in the black market?
People are free to select their buyers and sellers because no regulations exist governing the grey/black market.
What do you mean by grey market?
The grey market refers to the unofficial trading of goods or financial securities outside authorized channels. It involves transactions that may lack producer approval or compliance with official regulations.
Are GREY markets illegal?
Grey markets are not illegal but operate outside authorized channels. They involve trading goods or securities by unauthorized dealers. While not illegal, they may lack producer approval and official regulation.
Is it OK to buy from grey market?
Buying from the grey market is legal, but it carries risks. Products may lack warranties or support, and authenticity can be uncertain. Consider pros and cons before purchasing.
What is the grey market in India?
In India, the grey market refers to legal and unofficial trading of stocks, often related to IPOs. It operates outside official stock exchanges but is not illegal.
