Why IPO GMP Isn’t Always Accurate: Understanding Real vs. Guessed Premiums

When a new company decides to sell its shares to the public for the first time in an Initial Public Offering (IPO), it often creates a lot of excitement. During this time, you might hear about "IPO GMP." Many investors pay close attention to it, but it’s important to understand what it is and what it isn't. It's more like an early hint of what people are thinking, not a guaranteed prediction of the future.

What is IPO Grey Market Premium (GMP)?

Before a company's shares are officially for sale on a stock exchange, people sometimes trade them in an unofficial market. This is called the IPO grey market. The IPO Grey Market Premium (GMP) is the extra money that investors are willing to pay for these shares, on top of the official IPO price set by the company.

For example, if a company sets its IPO price at ₹100 per share and the GMP is ₹30, it means people in the grey market are buying and selling the share for ₹130. This shows they expect the stock to start trading on the official exchange at or near that higher price.

People often see the GMP as a way to measure how investors feel, or an IPO GMP as a sentiment indicator. It shows the early demand and excitement for a new IPO. A high GMP points to strong investor interest. A low or even negative GMP might mean there is less interest.

How is IPO GMP Calculated?

Figuring out the GMP is simple. It's the difference between the share price in the grey market and the official IPO price.

The formula is:

GMP = Grey Market Price – IPO Issue Price

For example, if shares are selling for ₹520 in the grey market and the IPO price is ₹450, the GMP is ₹70. This extra amount is based on supply and demand in the grey market. If lots of people want to buy the shares before they are officially on sale, the premium increases. If interest is low, the premium might drop or go away completely.

Why IPO GMP is Not Always Accurate

While GMP can give a hint about what the market is feeling, it can't always predict the future. It is not always a sure sign of how a stock will do on its first day of trading. Sometimes, IPOs with a high GMP have started trading at a lower price. In other cases, IPOs with a low GMP have done surprisingly well.

Here are some reasons why IPO GMP isn't always accurate:

1. The IPO Grey Market is Not Regulated

The IPO grey market is an unofficial space with no rules. Official groups like SEBI (Securities and Exchange Board of India) do not control the trades. Instead, people make deals based on trust and often pay in cash. This means there is no legal protection if a deal falls through. This lack of control makes the market less clear and easier to manipulate.

2. It's a Price Based on Guesswork, Not Facts

The GMP is just a price based on guesswork in IPOs. It comes from what people expect and the excitement around it, not from the company's finances or solid business facts. The real starting price, however, is affected by many other things. These include the company's performance, the general state of the market, and demand from large investors.

3. It Can Be Easily Manipulated

Because the grey market has no rules, it can be open to IPO grey market manipulation. Large investors can falsely increase the GMP to make it seem like there is high demand. This can trick smaller investors into buying. This can lead to disappointment if the real starting price does not match the high expectations.

4. The Overall Market Mood Has a Big Effect

The GMP can change quickly depending on the general mood of the stock market. If the market is doing well (positive), GMPs are usually higher. On the other hand, if the market is doing poorly (negative), even a good, solid company might have a low GMP. This means the GMP often shows the current market trend more than the company's real worth.

Risks of Depending on IPO GMP

Making investment choices based only on GMP can be risky for a few reasons:

• You Might Ignore the Facts: Focusing on GMP means you might ignore important details. You should look into the company's finances, its chances for growth, and how it makes money.
• Prices Change Quickly: GMP values can be very unstable. They can change every day because of news, rumors, or changes in how the market feels.
• No Legal Help: Since grey market deals are unofficial, you have no legal options if there are problems or if someone doesn't pay.

How to Use IPO GMP Wisely When Investing

Even with its problems, IPO GMP can still be a helpful tool if you use it the right way. Don't treat it as a sure thing. Instead, think of it as a way to check the market's mood.

Here’s a smarter way to use it:

1. Use it as One of Many Clues: Look at GMP as just one piece of information. A strong GMP might show positive feelings, but it should not be the only reason you decide to invest.
2. Focus on the Company's Health: The best way to judge an IPO is to study the company. Look at its finances, its place in the industry, and its potential to grow in the future.
3. Look at the Whole Market: Pay attention to how the stock market is doing overall. Also, look at the specific industry the company is in.

To sum up, people can argue about the accuracy of IPO GMP, but it is still a popular way to measure early investor interest. By understanding that it is based on guesswork and knowing the risks of depending on IPO GMP, you can make smarter investment choices. This will help you see the difference between a company's real value and the temporary excitement around it.