Why GMP Is Important in IPO

Out of sheer excitement, some investors oversubscribe an IPO application. While others regret not applying for an IPO in time. If you are facing one of these situations then it will be a big help to know why GMP is important and how the grey market can rescue you?

GMP is very popular term aming investors who are more into investing in IPO. In case, you haven’t been introduced to the grey market yet, then you are going to be really surprised to know how this unregulated market influences an IPO before the actual IPO listing time. Also, the term GMP or grey market premium is derived out of its reaction to the grey market.

Hence to understand why GMP is important without establishing the context of the grey market will be just fruitless to do. So let’s first define the grey market, shall we!!

Grey Market IPO

As the name suggests, there is nothing that is well defined in the grey market. In other words, nothing is black or white. To be precise, the grey market is a window for traders and investors to buy or sell IPO shares outside the authorized channel.

And when we say there is nothing well defined or established we simply mean that all trading in the grey market is through word of mouth.

Grey market is beneficial to those buyers who missed an IPO application deadline. Similarly, this market can be used by sellers to make profits in case the selling price in the grey market is up because of demand among the buyers.

Some investors can predict that an IPO valuation is going to rise further on IPO listing, they will look to buy more IPO shares, but once an IPO application deadline is over, then they are just left with the option of grey market trading.

You should know that grey markets have existed for quite some time now, although this can’t be ignored that they aren’t regulated or recognized by authorities the world over.

Now that it is clear what a grey market for IPO is all about, we will next establish its relation between GMP and exactly why GMP is important?

Grey Market Premium

Firstly let us just define GMP or grey market premium and know how to calculate GMP for IPO?

To put it simply, GMP is nothing but the amount, over and above the actual IPO price, when traded in the grey market. The following formula will simplify this definition.

IPO price in Grey market = IPO listing price + Grey Market Premium

Don’t forget that this GMP is outside the actual stock market pricing, hence it is important to understand the significance of GMP, just the definition won’t be sufficient if you wish to indulge in grey market trading.

And to understand the importance of GMP first you should know where this GMP comes from and who decides its value.

Well, GMP is a value that is defined by the simple principle of demand and supply. As you might have guessed, GMP rises if the sellers feel that the demand among the buyers for this IPO is high. Conversely, GMP remains less in case buyers are not interested in buying any more shares because they feel the IPO is overrated and might fall once it launches.

And in this explanation is hidden the answer to why GMP is important.

The fact that the GMP value can be high or low will always indicate to an investor how this IPO will perform on listing day.

Although this is not an exact science and this indication can prove to be a false one but still, GMP is not irrelevant. Even if an investor does not directly trade in the grey market, but they can still utilize the information of GMP value to decide an exit strategy.

Another reason why GMP is important is that it will help an investor know before the listing day whether this IPO stock has any long-term significance or should just be sold as soon as possible. In other words, this can give the investors a warning signal at times.

Therefore, careful observation of GMP is necessary to better grasp the overall market or trader sentiments before the IPO is launched in the white market.

Conclusion

No doubt, GMP is a good indicator for an IPO that has not yet ventured into the stock market, but the fact that the grey market is unregulated hence that also makes it prone to manipulations.

But in case, you feel you have oversubscribed an IPO then you should know how to sell IPO in grey market.

All in all, it is important to control emotions and excitement. Trading in the grey market is not unusual but caution is essential. And even if GMP indicates to certain trend, the point still remains that the stock market is highly volatile and unpredictable. Therefore high volume trading in the grey market might not be as feasible as it seems.