Nowadays, almost everyone is aware of the Initial Public Offer (IPO) and investment in IPO's have been increasing day by day. If you have been investing in an IPO, you might have come across the word grey market. As an investor, it is very important to learn about the grey market.
An IPO grey market is an unofficial market where IPO applications and stocks are bought and sold even before they are available on stock exchanges. The IPO market is regulated by the Securities and Exchange Board of India (SEBI), but IPO grey market is not regulated by SEBI or any other governing body. Almost all the transactions in IPO grey market are done in cash and they do not have any official relationship with the IPO market.
Transactions that take place in the IPO grey market run mostly on trust and are not backed by stockbrokers. Under grey market, interested traders can bid and offer shares of an upcoming IPO. These are not real shares of the IPO, but just unofficial forwards of the shares.
Investors, who apply for an IPO, take a financial risk because they may not get the shares or even if the shares are allocated, there are chances of shares getting listed below the issue price. These are the sellers.
There are some people who think that the value of the share should be higher than its issue price. These people collect the shares even before they are allocated. These are the buyers.
Buyers who wish to buy IPO shares, contact grey market dealers and get the orders placed to buy IPO shares at a certain premium. After receiving the orders, grey market dealers contact the sellers (who have applied for IPO shares) and ask if they are ready to sell the shares, if it gets allocated at a certain premium now.
See Also: How To Invest In IPO?
If the seller is not ready to take a risk in the market and wants to make a profit, he/she can sell the IPO share to the grey market dealer. Sellers have to finalize the deal with the grey market dealer. After finalizing the deal, the grey market dealer will collect the application details and inform the buyer that he has bought a certain number of shares.
After allotment, sellers may or may not receive the shares. If the share is allocated, the seller will be asked by the dealer to sell them at a certain price or to transfer it to some demat account. If the shares are sold, settlement will be done based on the profit or loss and the grey market premium at which buyers and sellers made a deal.