Summary
- The grey market premium is the premium amount investors are willing to pay on an IPO share in the unofficial market before listing on the stock exchange.
- It reads the sentiments and demands of the IPO shares in the market.
The grey market premium is the additional amount that investors are interested to pay for IPO shares in the grey market, ahead of its listing on the exchange market. The grey market premium operates outside the regulatory framework and is not governed by any regulatory authority.
The GMP is the difference between the unofficial grey market price and the IPO issue price. It helps investors understand the demand and market sentiments about the IPO shares.
How is GMP calculated?
The formula that investors use to calculate the grey market premium is mentioned below.
GMP = Indicative Grey market price – Issue price of IPO
and
GMP Percentage = (GMP / IPO issue price) ✕ 100
The Grey market price is the premium price that investors are interested in paying for an IPO share and the IPO listing price is the actual price fixed by the company. This helps investors to understand the market sentiment regarding the IPO shares and make the necessary investment decisions.
Real-World Example
Let’s understand with the help of an example.
A company issued its IPO at ₹300 per share. Indicating positive market sentiment, the grey market price has reached ₹370 per share. In this case, the Grey Market Premium (GMP) would be ₹70 per share.
GMP is the excess amount at which IPO shares are traded in the grey market before listing.
Therefore, GMP = 370 – 300 = ₹70.
This indicates that the shares are being informally quoted at a premium of ₹70 over the IPO issue price.
And the percentage of premium = (70/300) ✕ 100 = 23.33 %
This represents the percentage of the additional amount that they would pay.
Based on the GMP, the informal expected listing price would be ₹370. However, the actual listing price may be higher or lower.
GMP vs Listing Price
The mentioned table shows the comparison between GMP and listing price.
| Basis | GMP | Listing price |
| Meaning | The premium above the IPO issue price in the unofficial market before listing | The opening price at which the shares begin trading on the stock exchange on the listing day. |
| Regulator body | Unofficial and outside the recognised stock-exchange mechanism. | Discovered through the regulated stock-exchange mechanism |
| Purpose | To evaluate market sentiment and performance before listing | To represent the official opening market price discovered through buy and sell orders on the listing day. |
| Volatility | It can change significantly before listing | Determined once when the shares open for trading. The market price may subsequently change throughout the trading session. |
Benefits and limitations of GMP
The benefits and limitations of GMP are mentioned below.
Benefits
- Evaluating early market sentiment: GMP can provide useful insights into investor interest and overall market sentiment surrounding an IPO.
- Evaluating demand: GMP also helps investors to evaluate the demand for the IPO shares being issued. An increasing GMP may indicate rising demand for the shares.
- Supports decision-making: It helps investors determine whether the investment purpose is suitable based on their risk appetite and financial goals.
- Estimating listing expectation: GMP estimates an indication of the expected listing price of an IPO based on investor sentiment in the grey market.
Limitations
- Unofficial market: The GMP is not operated by any regulatory body in the unregulated market, making it less transparent for investors to rely on.
- Influenced by Speculation: GMP is highly dependent on the market sentiment and speculation, which may not provide the actual fundamentals of the IPO.
- Highly Volatile: The premium is more likely to change frequently due to demand, market, and economic conditions.
Should investors trust the GMP?
The grey market premium (GMP) provides the estimate on the potential listing price of shares on the listing day. It helps investors understand the demand and market sentiment to make informed decisions.
However, GMP shall not be completely trusted because it is likely to change frequently due to market demands and fluctuating conditions. The GMP is also not regulated by any regulatory body, so it is mostly influenced by speculation in the unofficial market that may not provide the actual fundamentals of the IPO.
Therefore, investors must evaluate other fundamental information of a company and its upcoming IPO before making an investment decision. They may evaluate the financial performance of the company, IPO objectives, and its risk profile, etc. Investors must evaluate the company and IPO details alongside GMP trends to make an informed and effective decision, rather than depending only on the GMP.
Common Mistakes made by investors
The common mistakes that investors make while using GMP before investing are mentioned below.
- Solely dependent on GMP: Many investors may get attracted to an IPO share and make the investment, because it has a high GMP. It may help to estimate potential listing performance, but actual listing gains are not assured.
- Ignoring fundamentals: Investors may often ignore the other important fundamentals of the company, such as financial performance, IPO valuation, profitability, potential growth, etc., and make investment decisions only based on the GMP.
- Ignoring market conditions: Although the GMP evaluates the market sentiments and demand of the IPO being issued, it may generate disappointing returns due to a sudden change in the market conditions before the listing day.
- Avoiding risk factors: Every IPO has a risk profile mentioned in its prospectus. Many investors often avoid considering the risks involved and make decisions based on the GMP, resulting in poor decision-making.
Conclusion
The grey market premium indicates the additional amount investors are offering over the IPO price in the unofficial market. It is operated in the unofficial market. It is mostly driven by market sentiments and demands. It serves as a useful tool for investors when making investment decisions.
However, depending only on the GMP may not deliver fruitful returns, because it is mostly influenced by speculations and not actual fundamentals. It is highly volatile, making it less reliable for investors. Therefore, investors must evaluate the overall company fundamentals, IPO valuations, and other important factors alongside GMP trends before making an informed investment decision.
FAQs
What is the grey market premium (GMP)?
Grey Market Premium (GMP) is the premium at which IPO shares are traded in the unofficial market before their listing on a stock exchange. It reflects market sentiment toward the IPO.
How is the grey market premium calculated?
GMP is calculated by subtracting the IPO issue price from the price at which the shares trade in the grey market.
Does a high GMP guarantee listing gains?
No. A high GMP only indicates positive market sentiment. The actual listing price may differ due to market conditions, investor demand, and other factors.
Should investors apply for an IPO based solely on GMP?
No. Investors should consider company fundamentals, valuation, financial performance, industry outlook, and risk factors in addition to GMP before making an investment decision.
