How to Calculate GMP of IPO?

How to calculate GMP of IPO? Have you ever questioned the same? A lot of investors depend on the Grey market premium during IPO. But why gmp is important in IPO?

The GMP of an IPO can probably signal the future of an IPO; therefore, many investors want to learn how to calculate it.

In this article, we will talk about all the details required for the calculation of the Grey market premium and how you can make the best out of it.

Now before that, let us have a look at what is Grey market premium.

So, just like life can’t be just black and white, there is a grey market in the stock market as well. In the grey market, you can sell your IPO shares or application irrespective of the allotment of the shares.

Wondering how to sell IPO in Grey Market?

Well! as the name goes, the whole process is done in an unauthorized way where the private dealer is involved in buying and selling the IPO shares or application to the respective person.

In the grey market, the interested buyers pay an extra amount, i.e., the premium, to get access to the IPO shares or applications.

Let us now have a look at how to calculate the GMP of an IPO.

How to find GMP of IPO

GMP plays an essential role in the listing price and investors looking to invest in IPOs. But the question is how to calculate the GMP of IPO?

In the stock market, there are constant price fluctuations. The reason behind this is the changing demand and supply of stocks.

Not just in the stock market, but this happens with the general commodities as well. Similarly, the demand and supply of an IPO affect its grey market premium as well.

For example, if a company comes with an IPO of 100 shares, priced at ₹10 each. Now because of the objectives or the growth of the company, a lot of people are interested in investing.

And because of this, the IPO receives an application for over 120 shares. Now, in this case, the demand for the shares is higher than the supply. So, naturally, in this case, we can say that the IPO is oversubscribed.

But how is the GMP affected in this case? The grey market premium, in this case, will be higher. Since the demand for the IPO is more, the investors will be willing to pay more amount in addition to the price of the IPO.

GMP or the grey market premium also has an impact on the IPO listing. Wondering how?

So, a certain IPO is priced at ₹10 per share and the GMP is ₹5, what does it mean?

It means that an investor is willing to pay ₹15 for the IPO instead of ₹10.

It is also prominent that sometimes, the IPO listing price is a sum of IPO price+GMP. So, in this case, the listing price can be around ₹15.

Thus, we can conclude that to calculate the GMP for IPO, you need to observe and keep a close eye on the demand and supply of the IPO shares.

But a crucial question that pops up is, should an investor rely on IPO GMP?

It really depends on the other factors as well. It is no doubt that at certain times the GMP of an IPO can define the listing gains but not always.

There are some instances where the GMP signalled a good amount of listing gains because of a higher value but failed to deliver so.

In these cases, the person who gave the Grey market premium will have to suffer the losses, whereas the seller gets a definite profit of the premium.

So, while investing in an IPO it is essential that you look at the GMP but other factors as well.

Conclusion

So, if you are looking forward to how to sell IPO shares and reap the benefit of earning more from the public offerings then it is good to know the way to calculate the GMP of an IPO, you should understand the demand and supply of the same.

If the company has the potential to give great returns in the future, it will have a higher demand and thus higher GMP.

An oversubscribed IPO has better chances of a higher GMP whereas an undersubscribed IPO can have a low GMP.

Although GMP affects the listing price to some extent, it is always important to analyze other factors like the company’s fundamental, future objectives, as well.

If you feel that the GMP is great and you want to apply for an IPO, you need a Demat account. So, open your Demat account today and start investing!