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What is GMP?
Grey market premium or GMP is a premium amount paid at which initial public offering (IPO) shares are traded before it is listed on the stock exchanges. For instance, LIC fixes its IPO price at Rs 90 per share and its IPO GMP is 50, then the organisation will get listed at Rs 140.90. Eventually, investors will receive up to 55 per cent of the profit on listing day.
Simply put, IPO-bound firms test waters in the grey market before making the listing debut and the GPM acts as a key indicator that reflects how the IPO may perform on listing day.
The value of GMP changes on daily basis on the shares' demand in the stock markets. If the stocks generate strong demand before the listing, then the shares might open on higher profit and if there is a weak demand for the stocks in the market, then the shares are likely to open at a negative price.
A 'grey' market exists as a parallel unofficial market where investors trade for applications or shares prior to the official listing on the exchanges. In the grey market, shares are traded in cash and in person, whereas, an IPO market is a Sebi-regulated and recognised route for raising capital in the market.
However, a grey market is not officially authorised or regulated and stock exchanges, Sebi and brokers don't have any involvement or back any transactions taking place in the grey market.
On that account, there is no legal recourse extended to the parties concerned if, in case, the shares tumble.
The GMP for a particular IPO is be calculated as:
GMPR = GMP*Q
Q is the number of shares sold in the primary market.
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