Gray Market Explained
Grey Market stock can be explained as a market that works parallelly with the stock market. However, the traders deal with unofficial dealers in the market.
Grey is the colour that defines the thin line between white and black The concept of colour applies to the stock market as well. The white market is the open market. The trading places according to the rules and regulations whereas the black market means trading smuggled and illegal products in the market. Grey Market is the market that works outside the realms of official trading channels.
Legal and Unofficial Market
The grey stock market in India is legal and unofficial. Only the mutual trust between the traders is considered while trading in the grey market stock. In simple terms, it is a risky way of investment that leads to high returns. Major products traded in the market includes luxury products like bags. Some grey market stocks are issued by spin-off and various start-ups like Zomato to analyse and understand the market before getting listed on SEBI.
IPO Grey Market Premium
Grey market IPO also works in the market. However, it is not an official market of IPO market. The SEBI regulation does not promote raising funds through the Grey IPO market. Interestingly many companies are trading in grey market IPO and in return providing, the grey market premium which is earned over IPO bought and sold outside the stock market.
Working of Grey Market Stock:
The grey market stock is operated in two ways which are discussed below in detail:
The buy/sell of stocks outside the stock market:
Trading with this method leads to high financial risk as the shares are allotted outside the market. The major drawback is that it does not help in saving taxes for the traders. The gain earned in short term capital gain, which is taxable in nature. There is no regulatory body to manage, Hence the investors are free to choose the stocks on personal research. This makes this method a very risky venture for the new traders in the stock market.
Sell of IPO application at a higher price outside the market:
In this method, the working is like the IPO in stock trading. The buyers and sellers decide the certain price at a decided premium the share is allotted through the grey market dealer. The Grey market premium attracts various investors to select this method of trading. However, the price of the stock depends on the demand and supply as the traditional stock market works. The rate is decided beforehand where an individual pays for the IPO application at a fixed price. It is known as the Kostak rate. When the trading occurs in Kostak rates outside the market, the investors earn high profits. In the grey market stock can be bought even after missing the deadline. It leads to a boost in the price of IPO for various new ventures.
In the end, it can be concluded that the grey market help companies check the response from investors unofficially. This method is being adopted by various companies to make quality IPO in major stock markets.