Investor Basics: Gray Market

While getting in to the stock market is something that a lot of us do in one way or another (mutual funds, money market funds, 401K, CD's, just being a consumer of listed companies; in countless other ways both directly and indirectly, our money passes through the stock market) there is often the problem with the herd mentality a lot of regular traders get into. You will get into the market towards the top of a run up, hold for too long, and sell for a loss. It's happened to every active trader and it can be very debilitating. However there is another way; there is a way for you to get involved in a security before it becomes available to the masses. There is a way for you to be trading in the "gray market."

Many people may look to something like the gray market with some air of suspicion; as well you should. These are unissued shares and an agreed upon price for these stocks has not yet been established. So you could score quite well on your unlisted trades; you also though could be sold stock for far more than its worth and be left holding all this really expensive paper. Your trades could be very good, but the trades made on the gray market are just as likely to be bad.

When you're talking about buying shares on the gray market you need to remember a few things. For one shares on the gray market are not official; the shares in the company have not been issued yet. Even though the shares of companies not yet listed on a major exchange are not official they are also not illegal. So the gray markets seem to be something of a trial market. The powers that be surely know that these trades are going on; even if they don't endorse it, they also are doing nothing to stop it.

Trading on the gray markets are not stopped because the gray markets work in the markets favor. Not only can a securities price be better determined in these gray markets but the demand is a really key factor going in. Investors, regulators, traders, and the companies issuing the stock all want to know what the demand would be in the instance that this company did indeed go public. Trading in the gray markets is something of an investment by training wheels scenario where people can see if a stock can hold its own, if it's expectations need to be lowered, or if the initial public offering can take off and the stocks value can soar.

Sources:

http://www.investopedia.com/terms/g/graymarket.asp

http://www.investopedia.com/ask/answers/08/identify-gray-market.asp