What are the meanings of grey market price, Kostak, and how is it related to the IPO issue price?
IPO Grey Market is an unofficial market where IPO applications or the 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 can execute orders for preferred customers as well as provide support for a new issue before it is actually issued.
Note: As IPO Grey Market is an unofficial a.k.a over-the-counter market, there are no regulations around it. All transactions are executed in cash on a personal basis. SEBI, Stock Exchange or Brokers are not involved or back these transactions.
Mainly 2 transactions take place here:
- Trading (buy or sell) IPO Applications at a certain rate (premium) and
- Trading (buy or sell) allocated IPO shares before they list on stock exchanges
As you can see it’s over the counter, therefore trust is a very valuable thing here and hence it’s one of the reasons why Grey market trading is usually done among a small set of people who trust each other as there is no official platform or rules defined for these trading transactions
What is Grey Market Premium?
Grey Market Premium 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 positive or negative based on demand and supply of the stock.
Grey Market Premiums are also linked with the 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 the share
Mundra Port and SEZ Ltd
Issue Price: Rs 440 per equity share
Grey Market Premium: Rs 400 (Buyers)
This implies that buyers are ready to buy Mundra Port shares at 440+400 = Rs 840.
Issue Price: Rs 45 per equity share.
Grey Market Premium: Rs -6 (Seller)
This means sellers are ready to sell SVPCL shares at a discount of Rs 6. i.e. 45-6 = Rs 39.
What is Kostak?
Kostak Rate is the premium one receives by selling his/her IPO application (in an off-market transaction) to someone even before allotment or listing of the issue.
Why anyone should not buy IPO solely on the basis of oversubscription, GMP and Kostak
Oversubscription: Sometimes people apply for many lots just so that they can get one lot. Also, HNIs bid heavily through borrowed money just like they did in Ujjivan SFB and Dmart’s IPO.
GMP and Kostak: As mentioned, this is a small market and the small market’s indicators cannot be taken into account as a perfect indicator of the IPO’s performance.
The 3 factors mentioned are only some of the factors which influence an IPO’s long term prospects. At the end of the day, the company’s financial position will determine how the company will perform in the long run.
If you just invest in an IPO stock on the basis of those 3 factors, you are bound to lose money as IPO’s are generally used for profit booking on the day it is listed and due to heavy selling, the stock may even go below the issue price.
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