Explain how does Grey market works in stock market?

Grey Market is where Investors can sell their IPO Bid at the Kostak price. The premium price in rupees at the IPO Grey Market is called Kostak, or price of application. Usually, 'Kostak value' is the premium for a maximum number of retail applications in an IPO.

Grey Market Premium (GMP), is the expected premium at which an IPO can get listed.

Grey market transactions involve 2 parties.

• Seller of Bid (S).
• Buyer of Bid (B).

Investors who have sold their bid at the kostak prices are not at risk. He would be paid the predetermined amount, regardless of whether he will receive shares.

These bids are bought by risk-taker investors at Kostak Price. If the share was listed at Premium over the GMP, they would make money.

Let's look at RBL bank as an example.

• Issue price: Rs 225
• Lot Size: 65 Shares
• Kostak: Rs 700
• GMP: Rs 40

If you sell your bid to a buyer, he would need to pay Rs. 700

Now Share is listed at Rs. 300, which is Rs. 75 Premium over Rs. 225 Suppose you got allotment. You will then sell your shares at the listed price or higher. Your Capital Gain is Rs. 75 (300-225)*65 shares = Rs. 4,875. However, you cannot have 700 so the balance is the buyer's profit for taking on the risk. He must be paid Rs. 4175. If you don't receive the allotment, he can pay 700.