Grey market Price or GMP is the price at which a particular share is traded in the unorganized market that is also known as the “Grey Market” before the IPO (Initial Public Offering). Grey Market Price is an indicator of the demand for the shares of a particular company ahead of its listing. A high GMP over the issue price shows that there is a high demand for the shares as people are willing to pay more than the Issue Price and that can lead to a Listing Gain.
GMP (Grey Market Premium)-
Grey Market Premium or GMP denotes the price at which the Pre-IPO shares of that specific company are being traded before the IPO.
A company issues its shares to its management, directors, and employees in form of ESOPS (Employee Stock Ownership Plan). When these ESOPS are liquidated by the employees then these shares are exchanged in the Primary market without the medium of a Stock Exchange.
What does Grey Market Premium denote-
Grey Market Premium denotes the estimated current price of a share that is not traded on any Stock Exchanges. This type of exchange of shares is known as Over The Counter trading which is not exactly illegal but not regulated. As the stock is not listed on any Exchanges the investors cannot its current traded price, for these reasons people check its GMP to get an idea of the price of the stock Pre-IPO.
Example of GMP-
Grey Market Premium is only useful before the security is listed on the stock exchanges and while it is in the IPO days.
Let’s assume a company “X” is coming with an IPO in a couple of weeks at “Rs 250” per share. Now analysts might calculate its PE ratio and find out other parameters to calculate if it is overpriced or undervalued. But all those methods don’t count an important variable of Supply & Demand. Here is when Grey Market Premium comes into the picture. Grey market Premium also helps investors to get an estimate of the Listing price and get an idea of the Listing day gains they are going to get.
Let’s assume that “X” is a well-known company and investors believe that its IPO is going to be very highly over-subscribed which will decrease their chances of getting an allotment and increase the chances of it listing at a higher price or a Premium. In this case, investors might go to the unorganized market where these Pre-IPO shares are traded and buy the shares. Now when this person buys the shares, he pays a price for them. If the seller knows that the demand for the shares is high, they can sell them at a higher price.
If the buyer purchases the stock of “X” at Rs 400 per share then that turns out to be at a premium of Rs 150 per share. Hence it can be said that the GMP of “X” is Rs 150.
Conclusion- Grey Market Premium is monitored to estimate the current Demand & Supply for a particular security and make an estimate of the price at which it is going to get listed on the Listing Date. Grey market Premiums can often be manipulated by big players who are so-called operators, hence GMP should be used just as an estimate and should not be considered as the true depiction of the value of any security.