A Grey market on a stock is an unofficial market in shares before they have been officially listed and traded on the London Stock Exchange.

If the UK government is going to privatise one of its Utilities such as British Gas it will offer to sell shares to the institutions and general public. Anyone is able to apply for as many shares as they want, but they will often only get a percentage of their requirements.

The shares will be offered at a set price, say £2.00, but depending on how the market judges the success of the offer the financial spread betting companies will normally make a market before the shares are officially traded on the London Stock Exchange. Incidentally, although grey markets are unofficial they are perfectly legal.

Grey markets are not just available on government privatization issues but most new issues as long as there is good public interest. There was for example an active grey market in the shares of Lastminute.com before it was publicly listed and recently in Virgin mobile.

How Grey Spread Bets Work

Exactly the same as with any share spread bet. The spread betting company will quote a bid-offer price and traders can go long and short using the traditional pounds per point method. For Spread Betting Basics Click Here

• Assume that ABC Utility is going to be issued at £2.00
• It is heavily over-subscribed so the grey market may well be something like £2.25-£2.27
• This is the price that the spread betting companies assume the shares will trade on the first official day of trading
• A spread bet trader may think this price a little too rich, and so initiates a short position by selling £5 a point at the spread betting companies bid price of £2.25
• The grey market price is always moving on supply and demand factors as well as financial news
• In this example the client is right, covering (or buying back his short trade) as the grey market price fell to £2.16-£2.18
• It should be noted that the price of the grey market usually reflects where the spread betting broker expects the shares to close on the first day of trading (always check facts like this out)

Grey market trading using spread bets is an interesting way to trade but it is advisable to have a very good feel for the issue in question because normally the market that the spread bet companies quote is pretty accurate.

Applying For The Issue - Taking Profits In The Grey Market

Another way of using the grey market offered by the Spread Betting companies is to 'sell' your shares before you actually receive them.

If you feel that you are likely to get your allocation of shares or it has been announced that private investors will all get 5,000 shares, then you can take you profit before the shares are officially traded.

You would do this by selling short the grey market, and then on the first day of official dealings simultaneously buy back the short spread bet and sell the actual shares on the cash market through your traditional stockbroker.

Another way to do this trade would be to sell just part of your allocation to lock in some guaranteed profits. If you were allocated 5,000 shares you could for example just sell half of these via the spread bet market. As ever total flexibility is available using a spread betting company.