Published on [31-Oct-2023 ]
Author: Abhijeet Jadhav
The world of Initial Public Offerings (IPOs) can be thrilling, especially for investors and traders who aim to make a quick buck. One of the buzzwords that often circulates during IPO season is “Grey Market Premium” or GMP. This metric has gained popularity as investors and traders attempt to predict whether an IPO will yield profitable listing gains or not. But what exactly is GMP, and how does it work?
What is Grey Market Premium (GMP)?
In simple terms, GMP represents the price at which shares trade in the grey market before being officially listed on stock exchanges. It serves as an indicator of how shares might perform on the day of their listing. Let’s break it down with an example: Suppose a company launches an IPO with an issue price of ₹100 per share, and the GMP is ₹20 per share. This indicates that unofficial market expectations are that the stock will list at around ₹120. Investors who believe the IPO is undervalued can purchase shares at these unofficial prices, while sellers can pocket profits by selling above the issue price.
How is GMP Calculated?
The Grey Market Premium is determined based on the demand for and valuation of the stock. If there’s high demand or the market sentiment is that the stock’s valuation is fair, the GMP tends to be higher, suggesting the stock might list above its issue price. Conversely, if demand is low or the market views the valuation as expensive, the GMP can be low, zero, or even negative, indicating the stock may list below its issue price. Market sentiment plays a significant role, with a bullish market generally boosting GMP, while a bearish market can have the opposite effect.
It’s crucial to understand that GMP is a fluctuating and indicative figure. It’s not a guaranteed predictor of how the stock will perform upon listing.
Find all Grey Market Premium (GMP) of IPO here:
The Grey Market for an IPO
Grey markets for IPOs are unofficial, secondary markets that operate outside of regulated stock exchanges. Participants in these markets place bids and offers on shares of companies before they go public. These markets are typically managed by intermediaries or brokers who facilitate transactions and calculate the GMP based on factors like demand and company valuation.
Who Decides the Grey Market Premium?
The GMP is determined by various factors, including demand, supply, market sentiment, company valuations, financial metrics, and future prospects. Due to the anonymity of buyers and sellers in unlisted markets, it’s challenging to pinpoint a single entity or factor responsible for setting the GMP. It’s a result of multiple variables and parties involved.
Trading in the Grey Market
Trading in the grey market, also known as ‘Dabba’ trading, requires buyers and sellers to connect through a mediator or broker. However, it’s essential to note that these trades occur outside the recognized stock exchanges and are not authorized or regulated by them. This means the risk associated with such trades is relatively high, and there are limited mechanisms in place for addressing potential frauds.
GMP Track Record for Major IPOs
Grey market premiums are not always accurate, and they can sometimes be overly optimistic or pessimistic. To illustrate, let’s examine how GMP estimates have performed for some of the top IPOs of 2021 and 2022:
| Company | Issue Price (₹) | GMP (₹) | Estimated Listing Price (₹) | Actual Listing Price (₹) | Difference (₹) |
|---|---|---|---|---|---|
| LIC | ₹949 | ₹12 | ₹961 | ₹872 | ₹89 |
| One 97 Comm. (Paytm) | ₹2,150 | ₹30 | ₹2,180 | ₹1,950 | ₹230 |
| Zomato | ₹76 | ₹25 | ₹101 | ₹126 | -₹25 |
| Star Health | ₹900 | -₹50 | ₹850 | ₹845 | ₹5 |
| PB Fintech | ₹980 | ₹150 | ₹1,130 | ₹1,150 | -₹20 |
As seen in the table above, there are notable variations between the estimated and actual listing prices. Some IPOs exceeded expectations, while others fell short.
Conclusion: Use GMP as a Guide, Not a Guarantee
In summary, Grey Market Premium is a valuable tool for assessing market sentiment and expectations surrounding an IPO. However, it’s crucial to remember that it’s just one piece of the puzzle. Investors and traders should conduct thorough research, consider company fundamentals, and consult with financial advisors before making investment decisions. Grey market premiums can provide insights, but they are not infallible predictors of stock performance.
The world of IPOs remains dynamic, and while GMP can offer hints, it should be used as a guide rather than a guarantee when evaluating potential listing gains.
Downloads Market NSE : Stock Exchange app from play store for GMP and market news.
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Disclaimer: The information presented in this article is for educational purposes and should not be considered as financial advice. Investment decisions should be made after careful consideration of individual circumstances and risks. Past performance is not indicative of future results.