Introduction

Before an IPO lists on the stock exchange, there’s a hidden marketplace where investors trade shares unofficially—this is the IPO Grey Market Premium (GMP) market. But how does this market function? Who sets the prices? And why do investors rely on GMP? This guide explains the workings of the IPO GMP market in simple terms.

What is the IPO GMP Market?

The IPO GMP market is an unofficial, over-the-counter (OTC) market where investors trade IPO shares before they are officially listed. It operates outside stock exchanges and is driven by demand and supply.

Key Features:

• No formal regulation (not controlled by SEBI or exchanges).
• Deals happen privately between brokers, investors, and dealers.
• Prices fluctuate based on market sentiment and IPO demand.

How Does the IPO GMP Market Function?

The GMP market works in three stages:

1. Pre-IPO Bidding Phase

After an IPO is announced but before it closes, grey market dealers start quoting prices based on expected demand.

2. Trading in the Grey Market

Investors buy/sell IPO applications or shares informally through brokers. Two types of trades happen:

• IPO Application Trading: Buying/selling IPO application forms at a premium.
• Kostak Rate: Selling the IPO allotment chance (before listing).

3. Price Discovery & GMP Fluctuations

GMP changes daily based on:

• IPO subscription levels.
• Market trends (bullish/bearish).
• News around the company.

Who Participates in the IPO GMP Market?

Key players in the grey market include:

• Brokers & Dealers: Facilitate trades between buyers and sellers.
• High Net-Worth Individuals (HNIs): Bet on IPO listings for quick gains.
• Retail Investors: Use GMP to decide IPO applications.
• Arbitrageurs: Profit from price differences between grey & official markets.

How is GMP Determined in the Grey Market?

Unlike stock exchanges, GMP is not fixed—it is negotiated between buyers and sellers based on:

• IPO Subscription Demand: Higher bids → Higher GMP.
• Company Fundamentals: Strong financials attract premium pricing.
• Market Sentiment: Bullish markets increase GMP.
• HNI & QIB Interest: Heavy institutional demand pushes GMP up.

Risks & Limitations of the IPO GMP Market

While GMP provides insights, it has risks:

• Unofficial & Unregulated: No legal protection if deals go wrong.
• Speculative Pricing: GMP can drop suddenly before listing.
• No Guarantee of Listing Gains: High GMP doesn’t always mean high listing price.

How Do Investors Use the GMP Market?

Investors track GMP to:

• Predict Listing Price: GMP helps estimate potential gains/losses.
• Decide IPO Applications: High GMP → Apply, Low/Negative GMP → Avoid.
• Arbitrage Opportunities: Buy low in grey market, sell high post-listing.

Conclusion

The IPO GMP market is an unofficial but influential space where early price discovery happens. While it helps gauge IPO demand, investors must use it cautiously—GMP is speculative and not a guaranteed indicator of listing performance. Always research the company’s fundamentals before investing.

Now that you understand how the IPO GMP market works, you can make more informed IPO decisions!