What is GMP (Grey Market Premium)?

GMP refers to the extra price that an GMP in IPOs share commands in the unofficial market before it is listed on the stock exchange.

For example:
If a company sets its IPO issue price band at ₹300, and the GMP being discussed in the grey market is ₹150, then the expected listing price becomes:

₹300 + ₹150 = ₹450 (Expected Listing Price)

This shows that demand for the IPO is strong and investors are willing to pay a premium even before allotment.

How the Grey Market Works

The grey market is unregulated and operates privately among investors, often through dealers or brokers. There are two major activities:

1. GMP in IPOs (Buying/Selling IPO Shares Unofficially)

Before allotment, some investors agree to buy shares at a premium based on expected listing price.

2. Kostak Rate (Premium on IPO Application)

Investors sell their entire IPO application regardless of allotment.
Example: If Kostak = ₹1,000, then the buyer pays ₹1,000 even if shares aren’t allotted.

3. Subject to Sauda (STS)

This applies when the deal is valid only if the investor receives allotment.
Example: STS = ₹7,000 means:
If you get allotment → you earn ₹7,000
If not allotted → deal cancelled

Why GMP Exists

GMP exists because:

Investors want early indication of demand for an IPO
Traders try to estimate listing gains
Some investors want to lock listing profit before allotment
High-demand IPOs attract speculative interest

Essentially, GMP is a sentiment indicator.

How GMP Affects Investors

1. Shows Market Sentiment

A high GMP often indicates strong demand.
Example:
Nykaa IPO GMP crossed ₹700+ during peak demand.

2. Helps Predict Listing Gains

Investors use GMP to guess potential listing price.
But it’s not always accurate.

3. Attracts Retail Participation

When the GMP is high, more people apply for the IPO in hopes of listing gains.

4. Misleading During Volatile Markets

GMP can drop sharply if:

Global markets fall
Negative news appears
Subscription slows down

So, GMP alone should never be the basis for applying.

Is GMP Legal?

The grey market is not regulated by SEBI.
But it is not illegal either.
It simply operates outside the official exchange framework.

However:

There is no investor protection
Deals rely purely on trust

So investors should be cautious.

Advantages of GMP

1. Early Price Discovery

Investors get an idea of listing expectations before the IPO is listed.

2. Useful for Short-Term Traders

Traders who depend on listing gains use GMP insights.

3. Indicates Subscription Strength

High GMP usually correlates with:

Strong QIB demand
High HNI subscription
Positive brand perception

4. Helps HNIs Plan Funding

HNIs who invest using loaned funds (IPO financing) analyse GMP to judge profit potential.

Limitations & Risks of GMP

1. Unreliable & Speculative

GMP is based on unofficial trading and sentiment—it can change multiple times in a day.

2. Influenced by Rumours

Fake or manipulated GMP numbers are common in Telegram groups and social media.

3. No Transparency

Real GMP values are known only to a few brokers—public GMP is mostly estimated.

4. Market Volatility Impact

Even with high GMP, markets can crash on listing day.

5. No Regulatory Oversight

Since SEBI doesn’t regulate it, disputes cannot be resolved legally.

How GMP is Calculated

There is no exact formula.
GMP is decided purely through price negotiation between buyers and sellers.

But here is how listing gain is estimated:

Expected Listing Price = Issue Price + GMP

Expected Profit % = (GMP / Issue Price) × 100

Example:

Issue Price = ₹400
GMP = ₹120

Expected Listing Price = ₹520
Expected Profit = 30%

Real Examples from Recent IPOs

Zomato IPO

Issue Price: ₹76
GMP: ₹25–30
Listing Price: ₹125+
GMP correctly predicted strong listing.

LIC IPO

Issue Price: ₹949
GMP: Negative ₹10–20
Listing Price: ₹872
GMP accurately signaled weak sentiment.

Nykaa IPO

Issue Price: ₹1,125
GMP: ₹700+
Listing Price: ₹2,000+
Again, GMP prediction aligned.

But…

Paytm IPO

Issue Price: ₹2,150
GMP: ₹150–200
Actual Listing: ₹1,950 (fell sharply)

This shows GMP can be completely wrong too.

Should You Rely on GMP?

GMP should be used as a reference only, not a decision-maker.

Use GMP When:

The GMP trend is stable for several days
Subscription numbers support the GMP
Financials and fundamentals are strong

Avoid Relying on GMP When:

GMP is fluctuating wildly
Market conditions are weak
IPO fundamentals are poor

Better Indicators Than GMP

While GMP is popular, these official indicators are more reliable:

1. QIB Subscription

High QIB participation is the strongest positive signal.

2. HNI/NII Subscription

Shows the interest of big investors.

3. Retail Subscription

Reflects small investor sentiment.

4. Anchor Book Participation

If anchor investors include big names, confidence increases.

5. Company Fundamentals

Business model, financials, valuations, and future outlook matter more than GMP.

Why GMP Trends Matter More Than Single Values

A single GMP number means nothing.
But trend movement tells a story:

If GMP is rising:

Demand increasing
Higher listing possibility

If GMP is falling:

Weakening interest
Possible negative news

If GMP collapses just before listing:

High chance of flat/negative listing

How Retail Investors Should Use GMP

Here’s a simple approach:

Step 1: Track fundamentals

Understand the company and its valuations.

Step 2: Watch subscription numbers

Especially QIB and NII.

Step 3: Follow GMP trends (not isolated values)

Steady GMP = stability
Volatile GMP = risk

Step 4: Position sizing

Avoid oversizing based solely on GMP hype.

Step 5: Exit smartly

Even with high GMP, profits are only real when booked.

Conclusion

GMP is a useful sentiment indicator, but it should never replace proper IPO analysis. It helps predict listing gains but also comes with limitations, manipulation, and zero regulation. Smart investors combine:

Company fundamentals
Subscription data
Market conditions
GMP trends

…to form a complete picture.

Used carefully, GMP can give valuable insights. Used blindly, it can misguide.

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