Winning Bizness Desk
Mumbai. The gray market is an unofficial market for financial securities and its trading typically occurs when a stock is suspended from trading outside the market or when new securities are bought and sold before official trading begins. First of all, you should know that gray market is an unofficial market but it is not illegal. In simple language, the gray market trades those securities which will be offered in the near future. The gray market enables issuers and underwriters to assess demand for new offerings. Trading IPO shares in the gray market comes with full financial risk as sometimes these shares can be allotted below the issue price.
It cannot be settled until official trading begins
In gray market trading, when the trade is binding, it cannot be settled until official trading begins. In this, a dishonest party may withdraw from the business. Because of this risk, some institutional investors, such as pension funds and mutual funds, avoid gray market trading. When buying IPO shares from the gray market, buyers have to place the order at a fixed premium amount. The dealer contacts sellers and asks them to sell IPO shares at a gray market premium. Sellers who do not want to face the risk of stock market listing sell their IPO shares in the gray market at a fixed price.
Trading done in cash & in person
Gray market trading has been going on in India for a long time through which investors and traders check the authenticity of the stocks. This trading is done in cash and in person as it is an informal way of trading. The demand and supply situation is played by the gray market in which investors and traders trade stocks before they are listed. Gray market transactions are not supported by stock exchanges or third party firms like SEBI. Gray market premium is the amount at which IPO shares are traded in the gray market. Live gray market premium reflects how the IPO will react on listing day. When a company's shares come out with an IPO, they are bought and sold outside the stock market.
