What Is Grey Market & Grey Market Premium?

What Is Grey Market?

A grey market, also known as a parallel market, is one where trading of goods takes place outside the realm of the manufacturer’s official trading channels.
A typical example of a grey market is a small business selling merchandise of a particular company even though they are not the authorised dealers in the market. But it is important to note that the small businesses doing this are legal entities.

In comparison, a black market deals with goods that are generally smuggled into the country to avoid paying import duty and other charges.

What is IPO Grey Market?

IPO Grey Market is an unofficial market where IPO applications or shares are bought and sold before they become officially available for trading on the stock exchange.

It is 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. As IPO Grey Market is an unofficial over-the-counter market, there are no regulations around it. All transactions are done in cash on a personal basis. SEBI, Stock Exchange or Brokers are not involved or back these transactions.

What is the Grey market premium?

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 the 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.

For instance, let’s assume the issue price for stock X is Rs 200.

If the grey market premium is Rs 400, it means that people are ready to buy the shares of company X for Rs 600; (i.e. 200+400).

This is how a typical deal works out in the grey market.