What is GMP in IPO? How is GMP Calculated in IPO?
IPO GMP is the extra amount investors are willing to pay for shares before they are listed, indicating market demand and potential price rise, know here how to calculate it.
by V Gomala
Published Jul 30, 2024 | Updated Jul 30, 2024 | 📖 3 min read
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When investing in the Indian financial markets, it's important to understand IPO GMP, which stands for IPO Grey Market Premium. This is the extra amount people are willing to pay for company shares before they officially start trading on the stock exchange. This premium shows how valuable and in-demand the market thinks the company's shares are.
It's a useful indicator for investors because it gives an idea of how much interest there is in the shares and how much their price might increase once they are listed. Therefore, keeping an eye on grey market activities and the IPO grey market premium can help you make better investment decisions in India.
What is GMP in IPO?
Grey market premium (GMP) is the extra amount people pay for IPO shares before they are officially listed on the stock exchange. For example, if LIC sets its IPO price at Rs 90 per share and the GMP is Rs 50, the shares will be listed at Rs 140.90. This means investors can make a profit of up to 55% on the listing day.
In simple terms, companies planning to go public use the grey market to gauge interest in their shares before they are officially listed, and the GMP is an important indicator of this interest.
How to Calculate GMP for IPOs?
Once you understand what GMP (Grey Market Premium) is, you can use it to decide whether to buy an IPO (Initial Public Offering). GMP is an important indicator that shows the demand and price of an IPO before it is officially listed on a stock exchange. To calculate GMP, you compare the IPO's price in the primary market with its trading price in the grey market.
Use this formula for calculating the GMP of IPO,
GMPR = Gray Market Premium * Number of shares
Here’s a simple way to calculate GMP for IPOs:
- Gather Information: Find out the latest grey market price and the official issue price of the IPO shares.
- Determine the GMP: Subtract the issue price from the grey market price. For example, if the issue price is ₹100 per share and the grey market price is ₹102 per share, the GMP is ₹2 per share.
- Calculate the GMP Percentage: Divide the GMP by the issue price and multiply by 100. Using the example above, the GMP percentage would be (2 / 10) x 100 = 20%.
So, the GMP tells you how much extra people are willing to pay for the IPO shares in the grey market, which can help you decide whether to invest.
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1. What is IPO GMP?
IPO GMP stands for IPO Grey Market Premium. It is the extra amount people are willing to pay for company shares in the grey market before they are officially listed on the stock exchange. It indicates how much the market values and desires the shares
2. Why is IPO GMP important for investors?
IPO GMP is important because it provides insight into the level of demand for the shares and can give an idea of how much the share price might rise once it is officially listed. This helps investors gauge potential profitability.
3. How does GMP affect my investment decision?
GMP helps you understand how much extra investors are willing to pay for the IPO shares before listing. A high GMP suggests strong demand and potential for a price increase, which can influence your decision to invest.
4. How do I calculate GMP?
To calculate GMP, subtract the IPO's issue price from its grey market price. For example, if the issue price is ₹100 and the grey market price is ₹102, the GMP is ₹2 per share. To find the GMP percentage, divide the GMP by the issue price and multiply by 100.
5. What does a high GMP indicate?
A high GMP indicates strong market interest and high demand for the IPO shares. It often suggests that the shares could be priced higher once they are officially listed, potentially leading to greater profit.
6. What does a low GMP mean?
A low GMP suggests lower demand for the IPO shares and may indicate that the market does not expect a significant price increase once the shares are listed. It could be a sign to be cautious before investing.
7. Can GMP change before the IPO listing?
Yes, GMP can fluctuate based on market conditions, investor sentiment, and other factors before the IPO listing. Monitoring GMP regularly can help you stay updated on changes in market interest.
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