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  • What is Grey Market?
  • How Does It Work?
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What Is the Grey Market?

There are various markets for the trading of financial securities and while we are talking about markets, if you are someone who is an investor or are keen on knowing all the market updates, you must have surely come across the term ‘Grey’ Or ‘Gray’ Market. In this article we will understand what the grey market is, how does it work, is it legal and a lot more.

What Is Grey Market Trading?

Grey market is an unregulated, unofficial shares and application market for financial securities. It runs parallel to other markets such as formal stock exchanges but for companies and shares that are not listed on any stock exchange. When a stock that has been suspended from trading trades off the market or when new securities are bought and sold before the official trading begins, this is known as grey market trading.For a long time, there have been "grey markets" in India, and traders and investors often confirm the legitimacy of these exchanges. Before the shares are listed, traders and retail investors purchase them on the grey markets, which simulate a demand and supply situation. It also provides an exit strategy for anyone who has to withdraw from the IPO for whatever reason. Individuals can still purchase IPO shares even after the closing date

In the grey market, traders make unauthorized offers and bids on the company's shares. A company's equity is referred to as grey market stock, if it is offered to traders after the IPO date and price band announcements. It is typically controlled by a limited group of people, and transactions are dependent on mutual trust and confidence. In India, it is legal and unofficial to trade in shares on the grey market.

What is Grey Market Premium?

Grey market premium (GPM) is a premium amount at which grey market IPO shares are traded. The demand for a firm that is planning an IPO is used to calculate the grey market premium, also known as the IPO GMP. Immediately upon the publication of the IPO date and price band, the grey market begins informally in the unregulated market. Before investing in an IPO, investors always consider the premium, although this might change depending on the market, demand, and quantity of subscriptions.

The GPM depicts potential outcomes for the IPO on the day of listing. Although there is no guarantee, the GMP typically functions as intended and IPOs mostly list around the specified price.

What is Kostak Rate?

The Kostak Rate is the sum that an investor purchasing an initial public offering pays to the seller prior to the IPO's official launch or listing.The fluctuation of the Grey market premium is caused by bracket rates responding to the market. As a result, Kostak Rates are tied to the IPO Grey Market Premium so that investors might earn greatly from it.

People can sell the entire IPO application to the correct buyer, but since the buyer is unsure of how many shares the company will issue for that IPO, it becomes their responsibility.Another possibility is that the buyer will agree to pay a specific price for the application, and the seller and buyer will settle their discrepancies after the IPO is listed. The sum he pays the vendor is known as the Kostak Rate. The seller who is selling the application still bears the entire tax burden in the event of the Kostak Rates during the Grey market IPO sale.

Subject To Sauda

In the Grey market, the rate with which a buyer buys IPO shares is the Kostak rate, however, there is a “Subject to Sauda” clause as well.In the Subject to Sauda Clause, it will be mentioned that the deal will be valid only if the buyer gets the allotment during the actual listing. The subject to Sauda takes place when the buyer buys IPO shares before its listing in the share market.The Subject to Sauda further asserts that the buyer is not obligated to pay the Kostak Rate for the IPO application that they have purchased from the seller if the buyer is not allotted to the IPO listing.When an IPO share is traded, Sauda has a direct connection to the grey market premium.

Conclusion

It can be concluded that the stock's performance on the grey market predicts how it will do after it is listed. Despite being unofficial, the grey market is not against the law. Many parties and companies issuing an IPO find success with a grey market IPO.

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1 Lac Invested in ICICI Prudential pre-ipo turned into 2.3 Lac after listing.

ICICI Lombard

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400
IPO Price:
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1 Lac Invested in AU Small Finance Bank pre-ipo turned into 3.4 Lac after listing.

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1 Lac Invested in RBL Bank pre-ipo turned into 5 Lac after listing.

BSE

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200
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CDSL

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Nazara Tech

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1 Lac Invested in Nazara Tech pre-ipo turned into 3.6 Lac after listing.

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1 Lac Invested in Dmart Avenue pre-ipo turned into 2.2 Lac after listing.

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