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What is IPO Grey Market

What is IPO Grey Market?

An IPO grey market is an Over the counter (OTC) market where select members can place buy and sell orders for a stock pre-IPO. This is not a regular exchange but an unofficial market which is used to gauge the premium at which the IPO is likely to quote. The quotations of the IPO are in terms of premium or discount to the issue price.

The Concept of Grey Market Premium

There is some confusion between the grey market and the IPO market. The grey market is an unofficial market where the demand and supply for an IPO is gauged and accordingly it quotes at a premium or at a discount. There are large traders who purely trade on the premiums on an IPO. The entire trade happens outside the ambit of the stock exchange so you do not have any rights that you have when you trade on the stock exchange. It is an unofficial market based on trust and is normally used to gauge whether the IPO will list at a premium and by how much premium.

What Signals does the IPO Grey Market give?

Gauging IPO appetite
The IPO grey market is an indication of the appetite for the stock and can be broadly indicative of the actual demand for the stock when it lists. Normally, the grey market is used even by brokers and investment bankers to gauge how the actual IPO will list and whether the premium over the listing price will sustain or not?

An unofficial market
IPO grey markets do not trade in actual IPO shares and they only trade in contracts that are based on the IPO story as an underlying. To that extent they are exactly like the unofficial forward markets that we used to have for most commodities. Money flows in the grey market are largely unaccounted.

Not regulated
Most grey market contracts are purely based on slips of paper which are given to you and there is no official contract or anything of that kind. It is a market that is purely based on trust and that is why the market is kept closed and only select persons are allowed to trade in that market. You can transaction in the grey market unless you are an insider.

Useful price indicator
While the grey market is not an official market, various segments of the market use it differently. For the issuer and the BRLM, it is an indication of the appetite in the market and the strategy can be worked accordingly. Retail investors can decide whether they should hold on to the stock or just exit on the day of listing itself.

Inherent risks in grey market
However, one needs to take grey market premiums with a pinch of salt. That is because this market is not regulated by SEBI nor is there are any circuit filters in this market. Hence there can be huge fluctuations and hence relying on the Grey market beyond a point is not very wise. At best, one can take it as a rough indication of the listing.

What You Need to Know About the Kostak

If you are familiar with the grey market, you will be familiar with the concept of Kostak. What exacty is this Kostak all about?

Understanding Kostak
Kostak is the local or colloquial term for the price of an application. The price of application is the price at which you can sell the IPO shares even before it lists. For example, if you have applied for 1000 shares and allotted 200 shares, then your application value will be based on the likely premium for the 200 shares allotted.

Kostak price
You can unofficially exit at the Kostak price through your contacts in the grey market. Remember, our word of caution here. This is an unofficial market and so there is no SEBI authorization and there is no regulation. Any trades done by you in the grey market are entirely at your own risk only.

Forces of demand and supply
The price of the Kostak is determined by the forces of demand and supply like in any other unofficial market.

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