Attractive IPO GMPs: Why do investors always check GMP before investing in an IPO?

Comprehend the significance and impact on an investor's investment decision.

In recent months, the primary market in India has shown remarkable resilience, marked by a notable surge in both mainboard and SME IPOs. These IPOs have captured headlines owing to their unprecedented levels of subscription and robust stock market debuts, often resulting in impressive listing gains. Amidst discussions surrounding IPOs, one recurring topic of interest is the Grey Market Premium (GMP) for upcoming IPOs. 

Let's delve into what this term means and why investors are keen to assess GMP before investing in an IPO.

The Grey Market Premium (GMP) is a term frequently used in the realm of IPOs. It denotes the premium or variance between the price at which shares are traded in the grey market and the official IPO price established by the company. It serves as an indicator of the demand for IPO shares in the unofficial or grey market before their official listing on the stock exchange. It mirrors investor sentiment and their perception of the prospective value of the IPO.

The GMP is determined by subtracting the IPO price (the price at which the company offers its shares to the public) from the grey market price (the price at which shares are traded in the grey market). For instance, if a company intends to go public and sets its IPO price at Rs 100 per share, but in the grey market, shares are trading at Rs 150 per share before the official listing, the GMP would amount to Rs 50 (Rs 150 - Rs 100).

A positive GMP signifies robust demand for the IPO shares, indicating that investors are willing to pay a premium to acquire a stake in the company. Conversely, a negative GMP suggests weaker demand, possibly influenced by factors such as market conditions, company performance, or investor sentiment. Several elements can impact GMP, including the company's fundamentals, industry outlook, market dynamics, and the supply-demand dynamics within the grey market.

Investing solely based on GMP entails risks as it relies on unofficial market speculation, which may not accurately predict the future performance of the IPO or the company's stock post-listing. Operating outside regulatory oversight, grey markets operate with limited transparency and lack legal protections. Therefore, securities regulators often caution investors to exercise prudence when engaging in grey market activities.

It is essential to conduct a comprehensive analysis of the company's historical financial performance, evaluate the stock's valuation and returns relative to its listed peers, and assess both the company's and the industry's future growth drivers and potential risks.