If you are actively involved in the market, you have probably come to the white market, black market and surprisingly IPO Grey Market. A white market is one that is considered a legal, official, and authorized market for goods. A black market is a complete opposite which is illegal.
A gray market, on the other hand, stands for a market that exists with the knowledge of the owner of the goods but outside the official banks of the transfer. Today, we have an eye on the IPO gray market.
An IPO is a means for the company to raise capital for its growth and expansion needs. For the investor, this may be an opportunity to make a quick move to own the shares of a fast-growing company. The purchase of these shares is usually by authorized means which is a stock exchange regulated by SEBI.
What is an IPO Grey Market?
In a successful IPO, generally all of its shares are subscribed or oversized. In cases of superscription, shares are allocated on pro-rata, or in cases where membership is very high, a lottery system is adopted. The probability of allocation here is very low. In these situations, investors turn to the gray market for potential sellers who have also applied for allocation.
*The seller is the person who actually participates in the application for shares for the purpose of selling in the gray market.
*The dealer acts as an intermediary between the buyer and the seller.
*Buyer is the person who buys allotted or un allocated shares in IPO from gray market.
Timeline of an IPO
When an investor participates in an IPO through the white market, he applies on that day and opens the IPO. The process of allocation of shares generally takes about ten business days. It takes two weeks for the shares to be listed and to start trading after the IPO closes.When an investor joins himself in the gray IPO market, the business can start before the IPO starts and even after the allocation.
How does a grey market function?
In a gray market, trading is done through a dealer or intermediary.
*Gray market premium is determined based on market demand and conditions. The gray market premium is an amount more than the offering price (the offering price is the price at which the company sells shares to investors in the IPO).
*Buyers who are willing to buy it at this price make a deal with the middlemen. The intermediary, in turn, contacts the seller. Bids by buyers can be before application or even after their-location.
*The shares are then allocated to the seller. As soon as the shares are listed, under the buyer’s direction, the intermediary can direct the seller to transfer the shares to the buyer’s demat account. Or he may request that the stock be sold at the settlement price in the market and transfer the sale proceeds to the buyer.
Benefits of taking part in the Grey market
The main benefit that buyers receive is an increase in their probability of allocation of shares in matters of membership. Generally it takes up to 2 weeks from closing until the shares are listed. Buyers in the gray market bet on the fact that prices will be higher on the day of listing than the informal price from the gray market (including the gray market premium).
The buyer can sell it at a higher settlement price after the stock is listed and making a profit. On the other hand, the buyer also has to bear the risk of a possible fall in the price which may result in a loss.