How to Calculate GMP of IPO?

While exploring IPO in the stock market, you must have come across the term GMP. It stands for Grey Market Premium, representing the price at which shares are traded in an informal market. It functions independently and is not monitored by regulatory bodies like SEBI or the stock exchange.

Many investors in the market use GMP as an indicator to predict the possible IPO listing price of a stock. A key insight for investors is to understand how to calculate the GMP of an IPO. This blog will walk you through the step-by-step process of calculating GMP.

Formula to Calculate IPO GMP

The basic formula is:

GMP = Grey Market Price – IPO Issue Price

To get a clearer perspective, investors also calculate the GMP Percentage:

GMP % = (GMP ÷ Issue Price) × 100

Steps to Calculate GMP of an IPO

Step 1: Find the Grey Market Price:

The Grey Market Price is the rate or price at which shares of an upcoming IPO are being traded in the informal market, before the company is listed on the stock exchange.

Investor demand and sentiment are reflected in the GMP price. These prices can change daily based on investors’ excitement about the IPO or overall market trends.

For instance, an IPO’s issue price is ₹450, but in the grey market, buyers are ready to buy at ₹520. This means the grey market price is ₹520.

Step 2: Identify the IPO Price:

The issue price refers to the price at which a company officially offers its shares to the public through the IPO. This price is set by the company or underwriters after considering factors like valuations, demand, and the industry outlook.

For book-built IPOs, there’s usually a price band, and the final price is determined or set after the bidding process. The IPO issue price is ₹450 in our example.

Step 3: Subtract the Issue Price from the Grey Market Price:

Once you have both the values, simply find the difference between the IPO issue price and the grey market price to find the Grey Market Premium of that IPO.  

Applying Formula:

GMP = Grey Market Price – IPO Issue Price

According to the example,

• Grey Market Price is ₹520
• IPO Issue Price is ₹450

Grey Market Premium = ₹520 – ₹450 = ₹70

This means the shares are being traded at a premium of ₹70 in the grey market.

So, if you had applied this for the IPO, the expectation is that it might list higher than its issue price, offering potential listing gains.

Step 4: Calculate the GMP Percentage (Optional, But Useful):

While the absolute GMP tells you the premium value in rupees, the GMP percentage can help you compare different IPOs more effectively. The grey market price reflects the difference between the shares' unofficial valuation and their issue price.

Applying Formula:

GMP % = (GMP ÷ Issue Price) × 100

According to the formula,

• Grey Market Premium (GMP) is ₹70
• Issue Price is ₹450

GMP % = (₹70 ÷ ₹450) × 100 = 15.55% (16%)

This means investors in the grey market are valuing the stock at about 16% higher than its official issue price.

If the percentage is high, it signals strong investor demand. If the percentage is low or negative, it shows weak interest and possible listing risks.

Disclaimer: Grey Market Premium (GMP) values are based on unofficial market activity and may vary frequently. The information provided in this blog is for educational purposes only and should not be considered as financial or investment advice. Investors are advised to conduct their own research and consult a qualified financial advisor before making any investment decisions.

Conclusion

Calculating the Grey Market Premium is simple and straightforward. It helps investors get a preliminary sense of how successful an IPO could be. However, remember that GMP is just an unofficial indicator. It can change in an instant and doesn’t guarantee actual listing performance. It is advisable to consider the company’s fundamentals, industry outlook, and your investment goals along with GMP before making any decisions.  

FAQs

1. Can you explain the meaning of Grey Market Premium (GMP) in IPOs?

GMP refers to the extra price at which IPO shares are traded unofficially before listing. It indicates investor demand for the IPO.

2. Is GMP reliable for predicting IPO listing prices?

GMP provides only an estimate; it isn't always an accurate indicator. Market conditions can change the actual listing price.

3. Where can I check the GMP of IPOs?

You can check the Grey Market Price on financial news sites, stock forums, and websites specialising in IPO updates.

4. Can GMP be negative?

Yes, a negative GMP is an unofficial indicator, suggesting that the stock may list below its issue price.

5. Should I invest in IPOs based only on GMP?

No. Always consider the company’s fundamentals, industry outlook, and your financial goals along with GMP.