IPOs remain one of the most important financial occurrences that concern companies as well as shareholders. Aside from the formal IPO process, there are other important terms and ideas that investors should recognize. This blog post explores the basics of the Grey Market Premium (GMP), Subject to Sauda and Kostak Rate and how they affect IPOs.
Table of Contents
What is GMP in IPO?
Grey Market Premium (GMP) is a figure often utilized in the stock market to reflect the expected price of the stock in the market zone once a stock is floated. While PPS is the official price fixed at the time of IPO, GMP emerged from the scenario of the unregulated free market, or the grey market, which is not governed by a standard stock exchange.
How is GMP (grey market premium) calculated?
GMP is calculated based on trading that takes place in the grey market, which is a market among investors for shares of IPOs. This premium is given by the relationship between the price in the grey market and the IPO offer price.
For instance, if the IPO price is ₹100 and the grey market price is ₹120 than the GMP is ₹20. This means a potential of ₹20 per share once the stock is floated in the market to the investors and public.
High GMP means high demand and high investors interest in the IPO while low GMP may mean low interest or some negative factors considered in the IPO. GMP may vary depending on the overall conditions of the market, investors’ attitude, and other considerations.
IPO GMP Lists
The latest price for upcoming IPOs will be updated here.
Understanding Subject to Sauda in IPO
The term of subject to Sauda is common in the grey market concerning trades where the selling of the security depends on the subsequent IPO allotment. Which mean where an investor has allotted shares through IPO, he want to sell those to other investor before it listing on stock exchange.
How Does Subject to Sauda Work?
In the grey market, IPO applications or lots or shares can be bought or sold even before the actual listing of the issue. Such transactions are effected at a rate known as Subject to Sauda rate. This rate is in effect the fixed price of the IPO shares with the proviso that the investor will receive the allotted amount of the IPO shares.
For instance, if an IPO application is trading at ₹100 in the grey market but the official price is ₹ 110 then the transaction is contingent on the actual allotment as agreed. In the event the IPO is oversubscribed and the investor does not get the shares, the transaction is often not carried out.
Subject to Sauda can assist investors to freeze their IPOs at the price fixed at the time of the allotment excluding any change between the allotment and listing of the share.
Kostak Rate Explained
The Kostak Rate is also a significant factor in the grey market of IPOs. It defines the price at which IPO applications or lots are traded in the market before the shares are allocated.
Role of Kostak Rate
Kostak Rate is kind of a pre-trading sentiment analysis of the market towards the IPO company. It indicates how interested investors are in the Internet IPO and how much they are willing to pay to estimate the right to receive the shares.
For instance, if the Kostak Rate for an IPO is ₹500, it implies that investors are willing to spend ₹500 to have a chance at purchasing the shares even if they are not getting the actual allotment. This rate depends on aspects like the overall demand of the IPOs, the prospects of the company, and the market.
Impact of GMP, Subject to Sauda, and Kostak Rate on IPO Investors
The knowledge of GMP, Subject to Sauda, and the Kostak Rate can notably affect an investor’s plan. Here’s how:
- Investment Decisions: GMP helps reveal the possible IPO value within the marketplace. A higher GMP implies that there is potential for a share to increase thus guiding investors on whether to apply for the shares.
- Risk Management: Subject to Sauda and Kostak Rate offer mechanisms, it becomes possible to mitigate associated risks connected with investments in an IPO. They enable the investors to buy the shares or fix on the prices before the actual floating of the stock which can make the prices volatile.
- Market Sentiment: These metrics are so broad that they act as a comprehensive market indicator as it gives an investor an indication of market sentiment in an IPO.
Key Takeaways
- GMP: Measures the expected premium of an IPO in the grey market in relation to the official issue price.
- Subject to Sauda: A term used in the grey markets which are relies on the successful sales of allotments of shares.
- Kostak Rate: The cost of purchasing IPO applications or lots on the grey market before allocation.
Thus, understanding the above-mentioned concepts will help investors make fewer mistakes and better control their IPO investments.