Definition
A grey market, also known as a parallel market, consists of two distinct types:
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Market for Goods in Short Supply: This segment involves the legal trade of goods that are scarce and therefore command high prices. Unlike the black market, the grey market remains lawful.
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Market for Non-Issued Shares: This involves the trading of shares that have not yet been issued but are expected to be available soon. Traders and investors engage in transactions based on anticipated allocation of these shares. Market makers facilitate these pre-issuance trades, giving an indication of expected market price and potential premiums after the shares are officially floated. If an investor fails to receive the anticipated allocation, they may need to purchase the shares on the open market, often incurring a loss.
Examples
Example 1: Electronics Grey Market
One prevalent example of a grey market for goods involves electronics, such as smartphones and gaming consoles, during their initial launch. Retailers or individuals may purchase these items in regions where they are available and sell them in markets where they are not yet officially released, often at higher prices due to demand surpassing supply.
Example 2: Pre-IPO Share Trading
A company is about to go public and trade on the stock exchange. Before the official issuance of its shares, market makers create a grey market where investors can trade based on their expected allocations. An investor might agree to purchase shares at a set price, anticipating an initial public offering (IPO) allocation. If the actual allocation falls short, they may have to buy additional shares at a potentially higher price on the open market, thereby crystallizing a loss.
Frequently Asked Questions
What is the risk involved in a grey market for shares?
The primary risk is allocation shortfall. If an investor does not receive the expected number of shares during issuance and the market price rises, they must buy additional shares at the higher market price, resulting in a potential loss.
How does a grey market differ from a black market?
A grey market is legal and involves goods that are in short supply or shares awaiting issuance. A black market, on the other hand, involves illegal goods or unauthorized transactions.
Can the grey market impact the official market price of shares?
Yes, the grey market can provide an early indication of the initial market price and potential premiums, influencing the demand and price once the shares are officially issued.
Is trading in the grey market legal?
Yes, trading in the grey market is legal. However, it operates in a less regulated environment compared to the official market.
Are grey market investments suitable for everyone?
Grey market investments come with higher risks and are typically more suited for experienced investors who can tolerate potential losses and understand market dynamics.
Related Terms
Black Market
An illegal trade environment where goods or services are exchanged unlawfully, typically without governmental oversight.
Initial Public Offering (IPO)
The process through which a private company offers its shares to the public for the first time to raise capital.
Allotment
The process of distributing shares to investors during or after a share issuance, based on demand and pre-set criteria.
Market Maker
A firm or individual who actively quotes two-sided markets in a security, providing bids and offers and facilitating liquidity in the market.
Online References
- Investopedia: What’s a Grey Market?
- The Economic Times: Definition of Grey Market
- Financial Times Lexicon: Grey Market
Suggested Books
- “Investing in IPOs” by Tom Taulli: A comprehensive guide on the ins and outs of Initial Public Offerings.
- “The Stock Market: Understand and Predict the Result of New Issues” by Samuel Blankson: Essential reading for anyone interested in pre-market trading and the grey market.
- “Principles of Financial Regulations” by John Armour, Dan Awrey, Paul Davies, and Luca Enriques: This book covers the guidelines within which legal and grey markets operate.
Accounting Basics: Grey Market Fundamentals Quiz
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