How Does IPO Grey Market Work?
Published by Sharekhan Education | December 7, 2020
How Does IPO Grey Market Work?
Trading of IPO shares in Grey market
The grey market, like any other market, is composed of buyers and sellers.
The sellers are individuals who apply for the IPO shares through the application. These individuals make the application, whether or not they get the allotment of IPO shares. They are the risk-takers as they are also not sure whether the IPO shares will list above the IPO price or below.
Buyers believe that the IPO share price is worth more than it is getting offered in the IPO, and they would buy the shares from the sellers in the grey market through dealers. The buyers would then buy IPO shares from the sellers at a premium, which gets agreed upon through the dealer. Once the IPO is applied, the details of the application get shared with the buyer.
If shares get allotted, the seller may either get a call from the dealer to sell them at a certain price or transfer allotted shares to some Demat account. In case the seller sells the shares, the settlement is carried out depending on the profit or loss and the grey market premium at which buyers and sellers made a deal. If the shares aren’t allotted, then the deal gets canceled.
Trading IPO application in the grey market
Similar to the trading of IPO shares, IPO application also gets traded in the grey market. The buyers decide a premium at which they wish to buy the application. The sellers are paid the premium irrespective of whether the shares get allotted or not.
For the purpose of the safety of the transaction, a dealer is kept for this transaction. The seller sends the detailed form to the dealer. The dealer sends a notification to the buyer that he bought an IPO application at a certain premium from the sellers in the grey market. If the shares are allotted either seller may get a call from the dealer to transfer allocated shares to some Demat account or sell them at a certain price. In case the shares are sold, the settlement is made based on profit or a loss. If there is no allotment, the deal gets over without any settlement. However, the seller does get paid the agreed premium.
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