Truth About GMP in 90 Seconds | What is GMP in IPO | What is Kostak in IPO | Grey Market Premium

Dear investors and traders, If you are exploring what is GMP in IPO, Kostak in IPO, and the grey market, this summary of “What is grey market premium?” and kostak will be sufficient for you. 

In this article, you will know about what is GMP in IPO, Grey market, and kostak in IPO, what is traded in the grey market, is it legal or illegal, should you trade in the grey market, who trade in the grey market, participants in the grey market, advantages and disadvantages of grey market premium and kostak, the difference between grey market premium and kostak, how to check live grey market premium and kostak. 

Each time you hear about type IPO, you are introduced with basic terms like primary market, secondary market, issue price, GMP 

How to apply for IPO in India complete step by step guide.

IPO 

Whenever a private company wants to raise funds from the public  for the first time it sells its shares to the public called an Initial Public Offering

Primary Market

The allotment of shares to applied investors for the first time through initial public offering is called primary market 

Issue Price

The price at which a company offers its single unit of share is called issue price 

Secondary Market 

once shares are allotted to investors through IPO then the company is listed on the stock exchange where the allotted shares are traded as per Market price is called a secondary market 

In simple terms company if wants to go public it offers N number of shares at X price (issued price); An investor applies and shares allotted to them; Company is listed on the stock exchange at Y price (listing price). 

Hope you get a basic idea of IPO and listing of the company on the stock exchange. But when it comes to getting shares through IPO it becomes tricky. We will see what happens between the launch of IPO till its listing on the exchange.

Timeline for the company to get listed on the stock exchange

IPO  launch at an issued price 

Applicant apply for IPO (till IPO close date)

Lot of IPO is allotted to applicants (allotment date) 

IPO is listed on the stock exchange (listing date)

What is GMP in IPO

Its a place where investor trade their IPO application and allotted shares unofficially at a premium without any authorization is term as a grey market

What is GMP in IPO? (What is the gray market premium?)

As you notice there is a certain time period between IPO close date and listing date in which the applicants to whom are allotted can sell or trade allotted shares to another interested investor in grey market at a certain price above or below issue price is term as grey market premium or GMP in IPO

Example of GMP in IPO

Let’s assume Company A issued lot of 100 shares at an issue price of 128-130

Mr. X applied for a lot and a lot is allotted to Mr. X

Another investor Mr.B also wants a lot of company A before listing as he expects that company will list at a higher price than the issued price. 

So he deals with Mr. X to get transferred Mr. X allotted shares to his Demat account by giving 150 per share to Mr. X. In this case, 130 is the issue price, and the extra 20 which the buyer is ready to pay is called premium or grey market premium or GMP in IPO. These unofficial deals are carried out in the Grey market or unauthorized market.

What is kostak in IPO

An IPO applicant sales their IPO application in the grey market at a certain price despite whether shares are allotted to them or not is called kostak.

Example of Kostak in IPO

Considered the earlier example, If Mr. Y wants a lot of company A he can purchase it from Mr. X even before shares are allotted to Mr. X just by paying for the application.

Just because Mr. X has applied, Mr. Y buys or deals with Mr. X to transfer shares after allotment by paying him 2000 called kostak.

If shares are allotted to MR. X will transfer it to Mr. Y and if Mr. X does not get allotment still Mr. X will be in profit as he has sold his application for 2000.

Mr. Y will profit if Mr. X get shares and its listing occurred at 160 or above 150

What is traded in the grey market 

generally, 2 instruments are traded in the grey market 

1 Trading of IPO applications

Even before share allotment, only based on applications are traded with mutual understanding between the parties.

That certain price is referred to as kostak.

2 Trading of allotted shares 

After allotment of shares investor sells it to other investors before listing in the grey market at a certain price refer as grey market premium or GMP in IPO.

Participants in the Grey market 

There are only three parties, the seller, buyer, and an intermediatory person or broker who puts them together and execute a deal between them.

If the seller sold allotted shares before listing, it will be called GMP in IPO and if the seller simply sold the application before allotment, it will be terminated as kostak in IPO.

The legality of Grey Market

To understand the legality of the grey market you must know key points about 

Grey market, GMP in IPO, and KOSTAK in IPO.

1 Here deals are made on mutual understanding in presence of a mediator or broker 

2 They are not under SEBI or any regulation 

3 Payments are done only in cash and there is no involvement of bank transaction 

By the above points, you must have Instinct that this is completely an official, unregulated, and off-the-record market and transactions. The government never promote the Grey market. You can get in trouble if any of the parties breaks the deal.

Should you trade in the grey market?

Mostly HNI or ultra HNI investors trade in the grey market. If you are a retailer then it is not advised to trade for GMP in IPO or Kostak In IPO. 

As they are only speculative and transactions are illegal if anything goes wrong then you can be in big difficulty financially or lawfully.

Read More

List of Upcoming IPOs 2021 Outlook

Things to Check before Applying for IPOs. For Short and Long Term Both.

How to Increase Chances of IPO Allotment? Not Getting IPO Allotment

How to check live GMP or Kostak

1 search “live GMP” on your web browser 

2 visit websites like ipowatch.in IPOGMP.in 

Here you can directly see live GMP or Kostak.

Disclaimer: Kostak price and GMP are completely unauthorized. They can only give you instinct about the listing of shares in the secondary market at a higher or lower price.

There is no body or regulatory to decide GMP or Kostak.

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Divyanshu Lad

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