What is Grey Market Premium (GMP)?

If you are interested in stock market and IPOs you would have heard a term known as GMP which stands for grey market premium. But many of you might not know what is the meaning of GMP? what does it indicate?.

In this article we will discuss about the meaning and the use of GMP.

But first let me explain you what are Different types of markets:

The first one is the white market known as open market. This is trustworthy market as it is regulated by laws

Example: Trading in NSE and BSE

The second market is black market or illegal market in which transactions are taken place to avoid taxes and price control

Example: Smuggling

The third type of market is grey market. It is a parallel or over-the-counter market but it is not illegal. Deals take place in an unofficial channel. Example: IPO grey market

GMP stands for grey market premium. It is a term used to estimate the price at which the IPO share would be listed in the market. This grey market operates before the listing and it starts from the IPO start date. With this, one can get to know the reaction on listing with an estimated price. You can check GMP of various IPOs on website such as 'ipowatch'. The Grey market premium is changed every day based on the demand of the shares in the stock market. If a stock have good demand before listing then they might open on higher profit.The IPO stocks which have weak demand on the market then they might open at a negative price.

Let me explain you with an example: A stock with IPO price of Rs. 250 is at Grey market premium of Rs. 100. It indicates that there is a possibility of the stock getting listed at around Rs. 350 (250+100).

Why people trade in grey market?

It provides an opportunity for retail investors and traders to purchase the shares before they are listed if they feel that the stock is going to increase in value. It allows people to buy IPO shares even after the deadline. It also helps the business which Is coming up with the IPO as it gives an idea about the demand for their shares in the grey market . Many shares are also being listed in the grey market which are not able to get listed on NSE and BSE.

All in all we can say that grey market premium reflects the market sentiment about that IPO.

However, GMP does not indicate a sure shot price at which the IPO will be listed because there are many other factors which influence the IPO listing price and one of the major factor is the market situation on the listing date.