What is the Gray Market?

In the investing world, a gray market exists when people begin trading shares that have not been issued yet. In the business world, a gray market is the novel but not always illegal process of obtaining goods or services.

How Does the Gray Market Work?

Let's say Company XYZ is going public on Tuesday. John Doe subscribed to the offering and will have about 200,000 shares. Jane Smith is anxious to get her hands on some of the shares but is not a subscriber. She calls John and offers to buy some shares from him as soon as they start trading. He agrees. Six other fund managers also call John and try to get some of his shares. John, Jane, and the other fund managers are creating a gray market for the shares.

Why Does the Gray Market Matter?

The existence of gray markets signals strong demand for a good, service or security. In the business world, products are sometimes less expensive in the gray market, though they also may be counterfeit, cheaply made, or infringing on a trademark.