Use GMP to invest in the right IPOs

A quick way to make gains in the stock market is through an IPO – Initial Public Offering – in which shares of a company are sold to institutional investors and usually also retail investors. There have been many successful IPOs that have given investors more than 100% listing gains. Nykaa in recent times made investors rich when it started trading at a premium of over 82% at Rs 2,054 per share on the NSE as compared to its IPO issue price of Rs 1,125 apiece. Imagine your money almost doubling in a span of few weeks (typical cycle of when you apply for an IPO and when an allotment is made). Of course, there have been cases where the listing has not been so great, like in the case of PAYTM – India’s biggest initial public offering (IPO). It failed to impress investors and Paytm shares listed at 9 per cent discount and closed at a price of Rs 1,560, 27.40 per cent below the offer price.

So what would be a good indicator to help you pick the right IPOs? There is no better way to judge a stock than by looking at its fundamentals – the profitability, market share, competitor analysis etc. But a quick indicator to the IPO listing would be through the GMP – Grey Market Premium- a term used in the IPO market to check what is the estimated price the IPO might list on.

The grey market is unofficial but it helps investors look at the likely market listing price of an IPO. It reflects the broad market sentiment about the particular stokc. The grey market works before the IPO listing and during the days from the IPO start date to the allotment date. The grey market premium indicates how the IPO might react on a listing day with an estimated price. If the company comes up with an IPO of ₹500 and the grey market premium is around ₹100 then we can assume that the IPO might list at around ₹600 on its listing day. The GMP varies every day in the run up to the date of application, and is an indicator of the likely range of the listing price.

Table showing the offer price, GMP and Listing price