There's a bridge between the colours white and black, which is grey. Just because the name is grey does not mean it's something bad.
Whenever a company launches its IPO, the whole process from bidding to the allotment till the listing of shares on the stock exchange, there comes a time when the shares have been offered but not yet listed on the stock exchange.
During this short period, off-the-table dealing of the shares takes place. This dealing does not involve the stock exchange or any regulatory body.
Hence, it's not a regulated exchange of shares, but it is not illegal as well.
What is the premium price?
If the issue price of the share is 100 rupees and after it is known that the premium is 20, then the price to buy a single share becomes 120 rupees.
This resultant price is what is called GMP. Now the profit and loss depend on if the share is getting listed at the GMP price or not.
How to check the grey market premium price?
The grey market premium price is decided according to the company performance and probability of subscriptions by each investor category.
Some websites provide live premium price updates on the IPO grey market. These are the sites where one can go and check the varying premium prices and check the strong chance of what the listing price of the stock would be on the exchange.
To know everything about Upcoming IPO Grey Market Premium, Click Here
How are these shares sold in the market?
Well, there is no official business associated with the grey market for dealing with shares. These shares are sold by brokers or local brokers who act as middlemen between the seller and the buyer in the IPO GMP.
The amount one investor pays to the willing buyer or seller of the entire IPO application before the listing to fix the profits is called Kostak rates.
The Kostak rates application on the investor depends on the IPO allotment. The buyer pays the Kostak rates for the IPO.
For example, if you completed four applications for one IPO and sold these applications for a fixed amount of 500 rupees per application, then the investor has secured a profit at 2 thousand rupees. The twist here is that even if out of the four applications, only two get successfully allowed, still the profit would remain 2k.
But if the holder of the application decides to sell these shares in the market and gets a profit of 4k, then also he will have to give the 2k to the buyer of the application. This is a secure way of selling your application in the IPO grey market.
Subject to Sauda
The amount decided when the investors receive the firm allotment on their IPO application is referred to as the Subject to Sauda.
If one buys or sells the IPO application on the subject to sauda, it means that one can receive the stated amount if the allotment is successful; otherwise, sauda will be cancelled.
The profit in this case because is determined by the allotment. Again, if one receives an allotment and sells the application for around rupees 100000, and the profit on a listing day is around rupees 150000, he will have to pay rupees 50000 to the person who purchased the application.
Expected return calculation based on different parameters
Returns are calculated based on demand, premium price, allotment. The higher the demand in the grey market depending on the company's performance, the higher chances of it getting oversubscribed, and the high chances of allotment happening through lottery basis.
The premium price added to the issue price is mostly the listing price as well, but it might not be so as well.