The gray market premium, or GMP, is a highly sought-after metric during an initial public offering (IPO).IPO) Season. Before listing any company, many investors closely track its GMP before deciding to invest in the firm.
Take the case of Life Insurance Corporation of India (LIC): Its GMP was negative for the past several days. Hence, its weak listing was expected. And, on Tuesday, stock . listed on 872, a discount of 8% on its issue price 949 each.
So, should you be relying on the gray market for any indication? While GMP turned out to be the correct indicator for LIC stock listing, it may not be the case with other firms.
What is GMP?
The gray market is an informal and close-knit market known to operate extensively in Gujarat, apart from Jaipur, Chittorgarh, Mumbai and Kolkata, where people buy and sell shares of companies that are listed at negotiated prices. make oral contracts. , among other things. with reference to the upcoming IPOMany look to the gray market to gauge investor interest in such stocks.
Those who are especially keen on making quick money, look to this market to see if a stock will have a bumper or weak listing.
For example, a stock that is quoting at a discount to the gray market is expected to have a short listing, while one trading at a premium may end up with a bumper listing.
For example, if a stock is quoted at 121 each in the gray market and has an issue price (at the upper end of the price band) 115, then its GMP is 6 ( 121- 115). but if it is quoted on 110 per, which means, it is trading at a discount (or has a negative premium) 5. Stock GMP information in the gray market is generally made available from the day of the announcement of the IPO price band, or sometimes even earlier, and continues till its listing.
For an IPO, there is no actual exchange of shares in this market. Trades are settled in cash on the day of listing taking into account the negotiated price and the listing price. No trading is permitted in unlisted shares (which have public shareholding) of a company which is for public listing after the filing of the IPO prospectus.
In case of unlisted companies having public shareholding, there are no shares to be traded in any way.
Should you trust it?
The ‘gray’ market, as its name suggests, is an unregulated market and hence, the numbers are difficult to verify.
The people we spoke to did not want to be quoted, but they suggested that investors decide to invest in an IPO based on company fundamentals rather than relying on GMP. According to him, there are many reasons for this.
One, it is difficult to say whether the prices quoted in the gray market can really be considered representative as one cannot know with certainty the volume of trades for the various stocks that take place here.
Two, in some cases, there may also be a risk of undue influence of certain players on prices and, therefore, cannot be relied upon. One of them suggested that investors should completely exempt GMP in case of small public issues.
Investors can also take lessons from several old IPOs such as Mahindra Logistics, Gland Pharma and SBI Cards and Payment Services, where there was a gap between what the gray market indicated (premium/discount) and how the stock listing went (at issue price). premium/discount).