Putting money into an initial public offering (IPO) can be both thrilling and dangerous. The Grey Market Premium (GMP) is a crucial consideration for investors prior to subscribing to an initial public offering (IPO). GMP serves as a gauge of investor demand and a stock’s prospective listing price. However, how is the Grey Market Premium taken into account for a fresh initial public offering? Let’s examine the idea in more detail and see how important it is.
What is Grey Market Premium?
The price at which an IPO stock is unofficially traded prior to its official listing on the stock exchange is known as the “grey market premium.” Based on supply and demand, investors purchase and sell initial public offerings (IPO) shares on the grey market, an unofficial over-the-counter (OTC) market.
If a company announces its IPO with an issue price of ₹200 per share and the grey market premium is ₹50, for instance, the stock is being traded in the grey market at ₹250 (₹200 + ₹50). This premium suggests the anticipated listing price upon stock market debuts of the company.
How is Grey Market Premium Calculated?
Although the computation of Grey Market Premium is mostly motivated by market forces, it is not exactly science. It relies on a number of elements including demand, supply, general state of the market, and company foundations.
1.Demand and Supply in the grey Market:
The Grey Market Premium(GMP) usually increases in cases of strong demand and oversubscribed an IPO. Should investors show less enthusiasm for the IPO, the GMP might be either low or even negative.
2.Subscription Status of The IPO:
Especially in the High Net-worth Individual (HNI) and Qualified Institutional Buyer (QIB) categories, a higher subscription rate usually drives up the GMP.
Should the IPO subscription be weak, the Grey Market Premium will either be low or might even turn negative.
3.General Attitude of The Market:
Since investors in bullish markets expect great gains, GMP usually increases. Lower or none at all premium could result from bearish market conditions.
4.Company Fundamentals and Growth Potentials:
The Grey Market premium is generally higher for businesses with good business models, growth opportunities, and good financials.
Weak financials or poor business prospects lead to lower GMP.
5.Recent IPO Performance:
Investors will tend to bet on new IPOs if recently listed IPOs have given good returns, which would increase Grey Market Premium.
Conversely, poor performance of a recent IPO can dampen sentiment and lower GMP.
Where Do I find grey market premium?
There is no regulated site to check for GMP since the grey market is not official. However, approximate Grey Market premium amounts based on market sources are given by various financial websites, stock market forums, and IPO discussion sites.
Is Grey Market Premium a Reliable Indicator?
Although GMP gives a rough idea of how an IPO will perform after listing, it should not be the sole factor in investment decision-making. This is why:
–Market manipulation: Since GMP relies on demand and supply, large investors and market players sometimes have the power to influence it to create hype.
–Highly speculative and sometimes unreliable: The grey market is not regulated by SEBI (Securities and Exchange Board of India).
–Not Always Correct: Although there are some IPOs with low or negative Grey Market premium that have delivered great listing gains, there are others with high GMP that have not generated returns.
Final Thought
Grey Market Premium is a vital meter that enables investors to estimate the probable listing price of an IPO. But it is not a guaranteed way of forecasting gains. Investors must employ GMP as only one among many tools, in combination with fundamental analysis, subscription figures, and market conditions, before investing.
Investment in an IPO must always be supported by comprehensive research and not solely depending on GMP. Happy investing!
