Gray Market Premium or GMP is a premium paid amount at which IPO shares are traded before they are listed on the stock exchange. For example, LIC sets its IPO price at Rs 90 per share and its IPO GMP is 50, then the organization will be listed at Rs 140.90. Eventually, investors will receive up to 55% of the profits on the day of trading.
Simply put, IPO-related companies test the waters of the gray market before debuting on the stock exchange and the GPM acts as a key indicator that reflects IPO performance on the day of listing.
The value of GMP changes daily based on demand for stocks in stock markets. If the stocks are generating strong demand prior to listing, the stocks might open at higher earnings and if there is weak demand for the stocks in the market, the stocks are likely to open at a negative price.
A “grey” market exists as an unofficial parallel market where investors trade requests or shares before the official listing on exchanges. In the gray market, shares are traded in cash and in person, whereas an IPO market is a regulated and Sebi-recognized route to raise capital in the market.
However, a gray market is not officially authorized or regulated and exchanges, Sebi and brokers are not involved in or support any transactions taking place in the gray market.
As such, there is no legal recourse extended to the parties involved if, in the event, the shares fall.
The GMP for a particular IPO is calculated as follows:
GMPR = GMP*Q
Q is the number of shares sold in the primary market.
