GMP (Grey Market Premium)
IPO Grey Market is an unofficial market of an IPO and there is official authority which governs it. GMP is a rate is used to buy IPO before even listing on stock exchanges.
So GMP is the extra premium one has to pay to buy an IPO share before it gets listed on the stock exchange. These transactions are done in cash only and are not regulated by SEBI or stock exchanges.
It is the overall premium one will get by selling 1 lot of IPO. One can easily calculate Kostak rates by multiplying GMP with the number of shares in a lot.
Use of GMP and Kostak rates
These rates are used by investors to check the demand and supply of an IPO. In case GMP and Kostak rates are high, one can expect a good listing of IPO on the stock exchange. But one should not rely entirely on GMP and Kostak rates. As said earlier these rates are not officially managed therefore an investor should do his homework regarding the IPO.
Do not get carried away with high GMP or Kostak Rates
These both should not be used as a sole criteria to invest in any IPO. There is no substitute for Fundamental analysis of the company before participating in any IPO. There have been cases in past when lot of investors have lost their hard earned money because of their greed and over dependence on GMP or Kostak rates. As an investor you should do peer analysis to find the competitiveness of the company and its valuations
For example these 2 IPO were showing Good GMP and Kostak rates but both of them listed below their issue price.
An investor should only participate in an IPO after he is fully convinced about the company and its IPO prospects.