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what is grey market & grey market premium?

Thursday, Jan 10 2019 9:04AM

What is Grey Market & Grey Market Premium?
A grey market, also known as a parallel market, is one where trading of goods takes place outside the realm of the manufacturer’s official trading channels.
A typical example of a grey market is a small business selling merchandise of a particular company even though they are not the authorised dealers in the market. But it is important to note that the small businesses doing this are legal entities.

In comparison, a black market deals with goods that are generally smuggled into the country to avoid paying import duty and other charges.



Since stocks are bought and sold in the stock market (like any other market), a parallel market exists here too.



What is IPO grey market?
An IPO grey market is one where a company’s shares are bid and offered by traders unofficially. This takes place before the shares are even issued by the company in an Initial Public Offering (IPO).



Since this is an unofficial market, there are no rules and regulations. Market regulators like Securities and Exchange Board of India (SEBI) are not involved in these transactions. The regulator doesn’t endorse this either.

Grey markets are generally run by a small set of individuals. All deals are based on mutual trust.



Grey market premium
Grey market premium is nothing but the price at which the shares are being traded in the grey market.

For instance, let’s assume the issue price for stock X is Rs 200.

If the grey market premium is Rs 400, it means that people are ready to buy the shares of company X for Rs 600; (i.e. 200+400).

This is how a typical deal works out in the grey market.



Let’s understand this with another example. Ashwin is a trader in the stock market. He is allocated 500 shares at a certain issue price in an upcoming IPO.



Meanwhile there are other investors, called ‘buyers’, who think that the value of the share is much higher than its issue price.





What is Grey Market & Grey Market Premium?
A typical example of a grey market is a small business selling merchandise of a particular company even though they are not the authorised dealers in the market. But it is important to note that the small businesses doing this are legal entities.

In comparison, a black market deals with goods that are generally smuggled into the country to avoid paying import duty and other charges.



Since stocks are bought and sold in the stock market (like any other market), a parallel market exists here too.



What is IPO grey market?
An IPO grey market is one where a company’s shares are bid and offered by traders unofficially. This takes place before the shares are even issued by the company in an Initial Public Offering (IPO).



Since this is an unofficial market, there are no rules and regulations. Market regulators like Securities and Exchange Board of India (SEBI) are not involved in these transactions. The regulator doesn’t endorse this either.

Grey markets are generally run by a small set of individuals. All deals are based on mutual trust.



Grey market premium
Grey market premium is nothing but the price at which the shares are being traded in the grey market.

For instance, let’s assume the issue price for stock X is Rs 200.

If the grey market premium is Rs 400, it means that people are ready to buy the shares of company X for Rs 600; (i.e. 200+400).

This is how a typical deal works out in the grey market.



Let’s understand this with another example. Ashwin is a trader in the stock market. He is allocated 500 shares at a certain issue price in an upcoming IPO.



Meanwhile there are other investors, called ‘buyers’, who think that the value of the share is much higher than its issue price.



These buyers are ready to pay a ‘premium’ on the shares in the grey market. Dealers in the grey market contact investors like Ashwin, called ‘sellers’. They decide to make a deal to sell the shares at a certain price (premium) that is higher than the issue price.



If Ashwin likes the deal and he is unwilling to take a risk with the stock’s listing, he sells his shares and books the profit.


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