Grey Market refers to the unofficial or unregulated market where goods or financial instruments are traded outside of authorized or legal channels. While the products or securities themselves may be genuine, their trade in the grey market occurs without the approval of the original manufacturer, issuer, or regulatory authority.

In the stock market context, the grey market is most commonly associated with Initial Public Offerings (IPOs). It operates before the IPO shares are officially listed on the stock exchange, allowing investors to buy or sell IPO shares or applications based on expected listing gains. These transactions are not regulated by SEBI or any stock exchange.

Key Features of the Grey Market:

• Unofficial Market: Operates outside the legal trading system, with no formal regulatory oversight.
• Used for IPOs: Traders and investors use it to speculate on the likely listing price of an upcoming IPO.
• Based on Demand: The price in the grey market reflects investor demand and market sentiment before listing.
• Transactions via Dealers: Deals are generally done in cash through brokers or dealers who specialize in grey market trades.

Important Terms:

• Grey Market Premium (GMP): The extra price that investors are willing to pay over the IPO issue price based on expected listing performance.
• Kostak Rate: The price a buyer pays to purchase the right to apply for an IPO through another personís application.

Example:
If an IPO is issued at ?500 per share and the GMP is ?100, it means that in the grey market, the shares are trading at ?600 (?500 + ?100). This suggests that investors expect the stock to list around that price after official trading begins.

Risks of the Grey Market:

• Not regulated by SEBI, hence no legal protection for investors.
• Prone to manipulation and misinformation.
• Counterparty risk, as transactions are based on trust without formal documentation.

In conclusion, the grey market serves as an indicator of investor sentiment and expected listing performance in IPOs, but due to its unregulated nature, participation carries significant financial and legal risks.