What is a grey market?

A grey market (or gray market) is an unregulated and unofficial market where a trader can buy or sell financial securities not currently available on official markets. This usually occurs when a company’s stock is not yet listed on the stock market through an Initial Public Offering (IPO). Another scenario is when a stock or other asset has been suspended from official trading.

Grey market explained

On the grey market, financial securities are always traded through over-the-counter (OTC) transactions. This means that they are not offered by any exchange but only by brokers or other trading providers. A good example is buying stocks before they are even issued by the company during the IPO. In fact, these are not real stocks but something like unofficial forwards on the stocks. In other words, a trader evaluates a company and makes a bid if its IPO stock price will be over- or underpriced.

Grey market premium

The Grey Market Premium (GMP) is the price at which a stock is being traded on the grey market. It is based on market sentiment. If demand is high and supply is low, the GMP is high. Otherwise, if demand is low and supply is high, the premium is low. Here’s an example:

Let’s assume that the issue price of the stock X is $100 and the GMP is $200. This means that traders are ready to buy stock X for $300 ($100 + $200). Profits and losses now depend on whether a stock is listed at the GMP price or not. If the stock’s closing price on the first day of trading is higher than the price paid before the IPO, the trader makes a profit. If the price after the IPO is low, the trader takes a loss.

Grey market vs. black market

Since the grey market is unofficial, it is not regulated by third-party businesses such as authorities. Also, there is no official platform, and all trading takes place among a limited group of people. All deals are based on mutual trust. Nevertheless, the grey market is completely legal, unlike the black one, which is outside the law.

Why trade on the grey market

The main advantage of grey market trading is that you can buy stocks before they are listed on any exchange. Then, if the IPO is successful, you will make a profit. Another point is that you can trade all those financial securities which are suspended from trading on the official markets.