What is IPO Grey Market?
IPO Grey Market is an unofficial market where IPO applications or shares are buy and sell before they become officially available for trading on the stock exchange.
Its an over-the-counter market where dealers may execute orders for preferred customers as well as provide support for a new issue before it is actually issued.
Note: As IPO Grey Market is unofficial over-the-counter market, there are no regulations around it. All transactions are done in cash on personal basis. SEBI, Stock Exchange or Brokers are not involve or back these transaction.
Grey market trading include :
- Trading (selling or buying) IPO Applications at certain rate (premium) and
- Trading (selling or buying) allocated IPO shares before they list on stock exchanges.
Grey market trading is usually done among the small set of people who trust each other as there is no official platform or rules define for these trading.
Two popular terms used in IPO grey market are ‘Grey Market Premium’ and ‘ Kostak’.
1. Grey market premium (or grey market price) is a premium amount in rupees at which IPO shares are being traded in Grey Market before they get listed in stock exchange. Grey market premium can be in positive or in negative based on demand and supply of the stock.
Grey Market Premiums are also attached with words ‘Buyer’ or ‘Seller’. They tell the price either at which buyers are willing to buy shares or the price at which sellers are willing to sell their IPO shares.
DMART IPO – Avenue Supermart
Issue Price: Rs 290 per equity share
Grey Market Premium: Rs 250 (Buyers)
This means buyers are ready to buy DMART shares at 290+250= Rs 540.
Issue Price: Rs 45 per equity share
Grey Market Premium: Rs -6 (Seller)
This means sellers are ready to sell SVPCL shares at the discount of Rs 6. i.e. 45-6 = Rs 39.
2. Kostak (or price of application) is the premium amount in rupees at which IPO applications are being traded in IPO Grey Market. Usually ‘Kostak’ value is defined as the premium of a maximum lot retail application in an IPO.
Kostak price is important mostly before issue is close for subscription and final bidding status is available to the IPO investors. Very few IPOs applications are traded after final bidding status is available to the investors.
‘Kostak’ is especially for people who do not want to take risk with IPO allotment or listing gains.
BGR Energy Limited
Issue Price: Rs 480 Per Equity Share (at upper band)
Lot Size: 14
Grey Market Premium: Rs 350 to Rs 360
Kostak (Rs 100000): Rs 2500 to Rs 2600
This means BGR applications of Rs 1 lakhs are being traded in IPO Grey Market at Rs 2500 to Rs 2600.
Even though the Grey Market Premium of this IPO is around 75% of the issue price, the ‘Kostak’ is just 5% of the application amount. This is because Grey Market traders are assuming that the issue will highly oversubscribe and there will not be firm allotment even for retail investors who will apply full Rs 1 lakhs. They are assuming one out of two people will get allotment and thus Rs 2 lakh investment will give them approximate Rs 5000 return. This way they are ready to buy 1 lakh application for Rs 2500.
Some more details can be found here