Trading in grey markets basically means trading over-the-top securities but not officially sold. It involves unregulated and unofficial brokers, traders, or sellers.
Due to this, grey markets are also known as parallel or middle markets. This article will give you an insight into what is grey market and all the important things you must know about grey market.
1. What is Grey Market About?
In Grey markets, the buyers and sellers start trading before the official release or sometimes even after suspension.
So, this can be explained by an example where the security issuing personnel look for the grey market pricing by selling a small part of the initial public offering (IPO) to some reputed investors or high net worth individuals.
This is done in order to create a viable demand for these shares during the actual IPO launch and it also helps to earn better trust among the other retail investors.
So, all the transactions that have been taking place in the grey market eventually get reflected in the official exchanges. The transaction amount charged for these securities is known as gray market premium (GMP).
The GMP in simpler terms can also be said as the rate at which a broker or an issuer sells securities in an unofficial manner.
This way other investors buy these securities in the gray market because of the company’s reputation, the demand, and the bull effect in the market.
In the same manner, there are investors who also buy IPOs in gray markets so that they have time to estimate the listing prices of the shares and can evaluate the gains or losses that they will have to incur.
However, in either case, there will also be risks and unknown factors involved in the process this is because there can be fluctuations or other variables involved.
2. Grey Market Stock
Grey market stocks are also known as parallel market stocks and these are different as compared to traditional stocks. These are traded also in a different manner which is outside the potential market working of regular stocks.
Usually, these are operated by intermediaries and brokers and work a lot on anticipation and prediction these come into play before the official listings are out.
The trading is run basically by demand and valuation, unlike the official trading practices.
It is also done via unauthorized or unofficial routes and procedures and has a scope of investment and withdrawal at any time.
3. Grey Market Goods
Gray markets are not limited only to shares or securities, it is basically a market for goods also where the channels are unauthorized.
So, these can include sellers selling products that are not legal or authorized in those vicinities or territories via unauthorized dealers. Such products could be electronic gadgets, shoes, or other products.
They attract customers more and create demand because the prices are cheaper than the actual store ones or via authorized sellers/resellers.
The catch however is that these products might not offer the same type of guarantee and post-purchase services as the original product and many times they can even be copies of the original products.
If not exact copies they can replicate products based on the same line of technology or base design.
Other means to accomplish the same will be selling gray market goods that are not brought from the original suppliers and selling them forward.
They can also procure goods via routes that are not authorized, this is done to get away from some extra charges that may apply if done in an authorized manner.
These goods might also void the legal agreements or not be in terms of the contractual agreements.
4. Pros of Grey Markets
The investors have a very flexible approach in a gray market scenario, they can invest and withdraw at an open timing.
So, even before the IPOs are officially listed they can withdraw which in turn would help them to take advantage of price fluctuations if any.
Along the same lines, we can also see that in the gray market securities, the issuers can provide an estimated pricing before the official listing thus providing insights that can help you make better and informed decisions.
Due to the parallel goods selling in the gray market, it provide the customers an opportunity where they can even buy goods at reduced prices from the authorized sellers as they have other options available at lower prices to compare with.
Even when we see the manufacturers, they benefit from gray markets because via both authorized and unauthorized ways they can actually expand the distribution via different channels, to not only increase the sales but also the profits.
There are times when even the official distributors use the gray market routes to sell off the excess inventory.
5. Cons of Grey Markets
Due to the unofficial timelines and the investment cycles that are being followed, the prices that are estimated for the IPOs in the gray markets are not reliable.
And there is an added advantage to the reputed or customary investors other than the seasoned high net worth individuals so this in a way hampers the natural market dynamics by limiting participation.
The quality of the products is the second most important thing which is not guaranteed in the gray markets because they might even be manufactured elsewhere.
Due to this, the original products of the brand are also affected and the brand’s reputation might not hold the same place in the long run due to the low quality counterfeits.
Similarly, the original and official distributors and supply chains are also disrupted which affects the product pricing along with other factors.
6. End Notes
For the gray market goods sold, we can see that not only are we compromising on the source of obtaining them, but it is highly likely that they might not even get a proper post-sales service as they are scored via unauthorized dealers and routes.