What is Grey Market?

A grey market is an unofficial place where stocks are traded, either before official listing or when trading is suspended on the main stock exchange.
What is Grey Market?
3 mins
28-March-2025

A grey market is an informal trading platform where securities are bought and sold outside regulated stock exchanges. It typically involves trading new securities before their official listing or dealing in suspended stocks. Conducted through unregulated channels, these transactions are unauthorised but attract investors looking for early market access.

The term "grey market" typically refers to the unauthorised trading of securities or goods through channels that are not recognised or regulated by the official authorities. In the stock market, the grey market involves the buying and selling of shares outside the official stock exchange platforms.

What is the grey market and how does it work?

The grey market, also known as the parallel market, is an unofficial platform where investors trade shares or IPO applications before they are officially listed on a stock exchange. These transactions occur in cash and in person without any oversight from regulatory bodies like SEBI or stock exchanges. Key terms associated with the grey market include Kostak and Grey Market Premium (GMP), which indicate pricing trends before an IPO is launched.

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How does it work?

Here is a breakdown of how the grey market works in the context of trading securities:

1. Pre-listing phase

The grey market activity usually begins during the pre-listing phase, before the company's shares are officially listed on a stock exchange. Companies planning to go public often conduct IPOs to raise capital by issuing shares to the public.

2. Unofficial trading

In the grey market, investors trade these yet-to-be-listed shares unofficially. This can happen through over the counter (OTC) transactions or other informal channels. Investors may enter into agreements to buy or sell shares at agreed-upon prices.

3. Determining prices

Prices in the grey market are determined by market forces such as demand and supply dynamics. The perceived value of the company, investor sentiment, and other market factors influence the prices at which shares are bought and sold in the grey market.

4. Risk and speculation

Grey market trading involves a higher level of risk and speculation compared to trading on official stock exchanges. Since these transactions are not regulated, participants may not benefit from the same level of investor protection, transparency, or legal recourse in case of disputes.

5. Settlement process

Settlements in the grey market typically involve the exchange of shares and funds directly between buyers and sellers. The absence of a centralised clearing system can increase the risk of default and settlement issues.

6. Transition to the official market

Once the company's shares are officially listed on a stock exchange, the grey market activity diminishes, and trading transitions to the regulated exchange. At this point, the shares are subject to the rules and regulations of the official market, providing investors with the safeguards and transparency associated with established exchanges.

What is a grey market stock?

A grey market stock refers to shares that are traded unofficially before a company's Initial Public Offering (IPO). In this market, traders bid and offer shares informally, relying on mutual trust rather than regulatory oversight. While legally permitted, these transactions remain unofficial and cannot be settled until the stock is officially listed.

Types of trading in grey market

The grey market offers two main types of trading for IPOs (Initial Public Offerings):

  1. Trading IPO Shares – Buying or selling IPO-allocated shares before their official listing.
  2. Trading IPO Applications – Buying or selling IPO applications at a premium or discount.

How are IPO shares traded in the grey market?

The process of trading IPO shares in the grey market involves a series of steps that bridge the gap between the IPO application phase and the official stock market listing. Here is a detailed breakdown of the key steps in the grey market trading of IPO shares:

  1. Investors apply for shares through an IPO, taking a financial risk as allocation isn't guaranteed.
  2. Buyers seek shares they believe will trade above their issue price.
  3. Buyers place orders at a premium through grey market dealers.
  4. Dealers contact sellers who applied for IPO shares and offer a premium price.
  5. Sellers who wish to avoid listing risks may sell to dealers at a fixed rate.
  6. If shares are allocated, sellers can sell at the agreed price or transfer them to buyers' Demat accounts.
  7. If no shares are allocated, the deal is automatically cancelled.

Conclusion

The grey market is a marketplace for trading securities and goods outside of regulated exchanges. This can involve buying and selling stocks before they officially list or trading in imported goods that have not gone through official channels. While the grey market can offer opportunities to profit from price discrepancies, it also carries a higher risk of fraud compared to regulated exchanges. Be sure to carefully consider the risks before participating in the grey market.

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Standard Disclaimer

Investments in the securities market are subject to market risk, read all related documents carefully before investing.

Research Disclaimer

Broking services offered by Bajaj Financial Securities Limited (BFSL) | Registered Office: Bajaj Auto Limited Complex , Mumbai –Pune Road Akurdi Pune 411035 | Corporate Office: Bajaj Financial Securities Ltd,1st Floor, Mantri IT Park, Tower B, Unit No 9 & 10, Viman Nagar, Pune, Maharashtra 411014| CIN: U67120PN2010PLC136026| SEBI Registration No.: INZ000218931 | BSE Cash/F&O (Member ID: 6706) | DP registration No : IN-DP-418-2019 | CDSL DP No.: 12088600 | NSDL DP No. IN304300 | AMFI Registration No.: ARN – 163403|

Research Services are offered by Bajaj Financial Securities Limited (BFSL) as Research Analyst under SEBI Regn: INH000010043. Kindly refer to www.bajajfinservsecurities.in for detailed disclaimer and risk factors

This content is for educational purpose only.

Details of Compliance Officer: Ms. Kanti Pal (For Broking/DP/Research)|Email: compliance_sec@bajajfinserv.in/Compliance_dp@bajajfinserv.in |Contact No.: 020-4857 4486 |

Investment in the securities involves risks, investor should consult his own advisors/consultant to determine the merits and risks of investment.

Frequently asked questions

Who should you contact to trade in the grey market?

There are no official people or businesses that you can approach for IPO grey market trading. If someone is interested in buying or selling IPO stocks in the grey market, they have to find a local dealer or online platforms where they can find buyers or sellers for them.

What variables determine the price of an initial public offering (IPO) on the grey market?

Several factors contribute to the IPO Grey Market Premium, including company fundamentals, market conditions, and investor sentiment.

What is a grey market?

A grey market is an unofficial marketplace for goods or securities traded outside of authorised channels. This can involve things like buying and selling stocks before they officially hit the market, or purchasing imported goods from unauthorized retailers.

Is it OK to buy from a grey market?

There can be risks involved with buying from a grey market. Products may not be genuine, lack warranties, or come with safety hazards. Prices can also be unpredictable. While it is not necessarily illegal, it is important to be aware of the potential downsides before making a purchase.

What is the difference between a black market and a grey market?

The key difference lies in legality. Black markets deal in prohibited goods and services, while grey markets deal in goods or securities that bypass authorised channels but are not inherently illegal.

What is a grey price?

A grey price refers to the unofficial market price of a security traded in the grey market before its official listing. It indicates investor demand and potential stock performance but is not regulated or recognised by stock exchanges.

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