What is the Grey Market? Meaning. How it Works and IPO Share Trading
28 May, 2025
Synopsis
Grey market is an unofficial market where unlisted shares trade before their listing.
Trading in grey market usually takes in a more informal way.
A high GMP or Grey Market Premium before listing may indicate strong interest, but it is not always reliable and should be used along with other factors such as fundamentals and subscription data.
The Indian IPO space has seen a surge in activity and interest, especially from retail investors. Alongside this buzz, another concept often appears in headlines and discussions: the grey market. Though unofficial and unregulated, this market plays a crucial role in gauging public sentiment ahead of an IPO listing.
Grey Market Stocks: What Are They and How Do They Work?
In the context of IPOs, the grey market refers to an unofficial channel where shares are bought and sold before they are officially listed on stock exchanges. These trades happen over-the-counter (OTC) between brokers and investors, without any regulation from the Securities and Exchange Board of India (SEBI) or recognised stock exchanges like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE).
There’s no central platform or digital order book. Everything operates on trust and pre-agreed contracts, sometimes settled in cash.
While unofficial, this market gives early clues about IPO demand, especially when popular offers see high subscription numbers from institutions and retail buyers alike.
Grey Market Premium Explained: Meaning and Importance
Grey market premium, or GMP, is the difference between the IPO issue price and the price at which the shares are being traded in the grey market. It’s one of the most watched indicators ahead of a listing.
For example, if shares in an IPO are issued at ₹300 and trading at ₹360 in the grey market before their listing, the grey market premium is ₹60. A high GMP, sometimes even 3–4 times the issue price, may signal strong listing day gains, while a lower or falling GMP may indicate weak investor appetite.
Many investors use GMP as a proxy for demand and possible listing performance, though it’s important to remember that these are not guaranteed outcomes.
Different Ways IPO Shares Are Traded in the Grey Market
Grey market trades generally take place in two formats:
Share-Based Deals
In these transactions, an applicant to an IPO agrees to sell the shares allotted in the IPO at a fixed grey market price if they are allotted. If no allotment happens, the deal is cancelled.
Application-Based Deals
These are further split into:
- Kostak rate: The applicant gets a fixed amount for the applicant by a grey market participant irrespective of whether shares are ultimately allotted to the applicant.
Subject to Sauda: In case the applicant is allotted shares in the IPO, it will get the price per share that is fixed in the grey market transaction.
These informal trades allow participants to lock in profits before listing or speculate on IPO oversubscription.
The Process of Trading IPO Shares in the Grey Market
Here's how grey market trading usually works:
Investors who have applied for IPOs reach out to brokers operating in the grey market.
Based on demand and subscription data, brokers quote a grey market premium.
If both parties agree, they enter a contract.
Upon allotment, the shares are transferred, and payment is settled as per the agreement.
Grey Market vs. Official Stock Exchanges
Feature | Grey Market | Official Exchange |
Regulation | Not regulated by SEBI | Fully regulated by SEBI |
Trading Mechanism | OTC, informal agreements | Digital order matching system |
Price Transparency | Limited | Full price discovery |
Settlement | Manual, cash-based | Online clearing and settlement |
While grey market trading offers early insights, it lacks the protections and transparency that come with formal stock exchanges.
Final Note
The IPO grey market plays a vital, if unofficial, role in shaping expectations before a public offering. From grey market premium to grey market price, these indicators offer early insight into investor demand. However, since grey market trading lacks regulation and transparency, it's best to treat it as one input in a broader IPO analysis, alongside fundamentals, subscription levels and sector outlook.
Want to make smarter IPO decisions? Explore expert insights and tools on HDFC Bank’s InvestRight platform.
FAQs
Is grey market trading legal in India?
Yes, grey market trading is legal in India.
Can I participate in grey market trading as a retail investor?
Generally, grey market trading is conducted by brokers and high-net-worth individuals. Retail investors can access it, but it's done informally.
What happens if an IPO doesn’t perform well in the grey market?
A weak or negative grey market premium may indicate low listing day interest. However, it doesn't necessarily reflect the company’s long-term potential.
*Disclaimer: Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing.
