For many of you who lead a colourful life, black and white may seem like two ends of a paradigm, where white conveys all that is correct and pure while black stands for all that is incorrect. However, when you exit the fictional world, just white or black life is impractical to attain. Thus, at a certain point, most of you take the mid route i.e., grey. Likewise, is the case for IPO stock market, it comes with a hue of grey. However, in this situation, the meaning is very different. Read on to know about IPO grey market.
IPO grey market – meaning
IPO grey market is the unofficial market where you buy or sell the IPO applications or shares before the upcoming IPO or new IPO is introduced officially for trading on stock exchange. There are zero rules and regulations around it because of its unofficial market scenario. All the transactions are on a personal level basis through cash. Any of the third-party firms such as stock exchange, SEBI or brokers are not included for backing the transaction in the IPO grey market. Also note, IPO grey market trading is performed among a limited set of individuals as there is zero official platform/rules for such trading. Two very common terms used in IPO grey market are Kostak Rate and Grey Market Premium.
What is meant by grey market premium (GMP) and Kostak?
GMP is the premium that you are willing to pay above the issue price. Note that issue price is the selling price at which the IPO shares are offered before they officially get listed on stock market. For example, assume the stock price of Health Up, a health insurance company is Rs. 100. In case the GMP is Rs. 250, it means that investors are willing to pay Rs. 350 (i.e., Rs. 100+ Rs. 250) for Health Up’s shares. For this matter, GMP can provide an analysis regarding how the company’s upcoming IPO may trade on the listing day.
Kostak rate, on the other hand, is linked with IPO applications. The rate at which you purchase IPO applications before their listing is called Kostak rate. For example, assume Ezekiel wants to invest in the health insurance company, Health Up. However, he has no demat account. For this, he approaches Idris who holds a demat account and has the potential to apply for the upcoming IPO. Ezekiel will pay Idris Rs. 1500 per application, which is the Kostak rate. As there are 4 applications, Ezekiel will pay Idris Rs. 6,000. It means that Idris has secured a profit of Rs. 6,000. Even if Ezekiel gets allotted just 1 application, Idris’s profit of Rs. 6000 will stay.
Why do investors trade in the IPO grey market?
IPO grey market has been in existence for quite a long time. It is because it provides a great opportunity to you to buy shares before their listing in case you anticipate the stock may rise in value. Next reason is if you want to quit the IPO even before its listing, the IPO grey market permits you with a way out.
IPO grey market is not an official market as it functions outside the purview of SEBI. Hence, there is zero guarantee. All the transactions are conducted on personal trust level basis and hold a counterparty risk. However, for any regular investor, IPO grey market can serve as a good indicator to know how the stock of the company may perform once listed.