An IPO grey market is an OTC (over-the-counter) market where stocks and IPO applications are bought and sold even before they are available on stock exchanges.
The term “grey market” implies that it is a kind of unofficial market. All transactions in an IPO grey market are done in cash and this market is not regulated by SEBI or other relevant governing bodies. Transactions in an IPO grey market are based on utmost trust but are neither backed by stockbrokers nor SEBI.
Trading in the IPO grey market includes the following:
- Buying and selling certain IPO applications at a premium, and
- Buying and selling IPO shares before they are listed on stock exchanges
One must understand that grey markets don’t have any official regulations and trades are generally conducted within closed groups.
You should be aware of two basic terms in the grey market i.e. premium and kostak.
Grey Market Premium
Grey market price or grey market premium refers to the premium amount at which shares and IPO applications are bought and sold before they are available on the stock exchanges. Demand and supply heavily influence grey market premium, which is either positive or negative.
IPO applications are traded on the grey market for a certain price. This is called the “kostak price”. Kostak price is influenced by many factors, but supply and demand play a major role too. The kostak price of an IPO application basically indicates the profit you will make if you sell your IPO application.
If shares get allotted, they will be owned by the buyer. However, if the stocks don’t get allotted, there is no refund. Kostak price is almost on its way out these days, looking at how oversubscribed some IPOs were.
The grey market remains a strong parallel market for people carrying out unregulated and unofficial trades and often offers guidance on where listing could happen and is therefore actively tracked by market participants. Any trade or bids done in the grey market does not have the authorization or approval off the regulator or any of the stock exchanges.
Do not subscribe for IPO by just seeing premium Price as it may change anytime before listing. There have been cases in the past where the grey market buyers cancelled the transaction when the market fell and the issue is not a success. As a result, the applicant is stuck with unwanted stocks not knowing whether to sell them at a loss or continue holding them.