Gray market is a market economy concept. It can be defined as a marketplace where the transaction of goods (stocks and commodities) take place through unauthorized channels, which may not be officially recognized. In simpler terms, any market place that is not officially recognized, may or may not be legal, is a gray market.
The gray market’s implications extend across industries from electronics to luxury goods, and from the stock market to pharmaceuticals and many more. This existence has greatly impacted the functioning of the market place along with the participants in the marketplace.
We will discuss this concept in regards to stock market and stock market operations. It is one of the important topic to understand.
Characteristics of Gray Market
Gray market has special offerings in the market economy. There are certain features that allow the gray market to exist in dominant form. Some of such characteristics are:
Such market allows pre listing trading. This means, stocks are traded before its listing on any stock exchanges. Investors and speculators engage in such activities predicting the potential future performance and valuation.
Unregulated or Under Regulated Trading
Gray market operations occur outside the formal setup of the stock exchanges. There are no rules to abide by and this market platforms may not follow or require any disclosure to operate. Due to this, they are exposed to high potential risk and the return is potentially higher and better.
Participants Trust Issue
Gray market operations are not for all. The nature of the this market creates confusion among consumers and investors regarding the authenticity of the market. There is no proper policy or a guideline from any authority of this, which can easily create a mistrust situation for this market.
Unlike any other regulated market, the gray market lacks information. The market operated on the basis of self evaluation of the participants. There is no information regarding the nature of the business, authentic financial disclosures, comprehensive data etc. to validate the operation and functioning. This limited data in such a market, allows this market to operate on speculation basis.
As there is no regulation in this market as such, taxes are not that mandatory. Participants decide a common ground of transaction and agree on it. Unlike regular market operations where you need to pay the taxes and tariffs on market operations, the gray market doesn’t have any taxes or tariffs.
High Risk and High Return
Traders perform gray market transactions before placing them in a formal market operation. Hence, the direction of such a transaction is uncertain and unknown. Investors invest, in any economic transaction, with limited information in their hands. Also, it is difficult to predict the nature and intention of other participants. This makes such a market a high risk profile market.
On the other hard, you are operating ahead in time which provides you the leverage for potentially higher return either by enhancing your profit or reducing your loss.