Gray Market

DEFINITION of 'Gray Market'

An unofficial market where securities are traded. Gray (or “grey”) market trading generally occurs when a stock that has been suspended trades off-market, or when new securities are bought and sold before official trading begins. The gray market enables the issuer and underwriters to gauge demand for a new offering because it is a “when issued” market, i.e. it trades securities that will be offered in the very near future. The grey market is an unofficial one, but is not illegal.

The term “gray market” also refers to the import and sale of goods by unauthorized dealers; in this instance as well, such activity is unofficial but not illegal.

BREAKING DOWN 'Gray Market'

In gray market trading, while the trade is binding, it cannot be settled until official trading begins. This may cause an unscrupulous party to renege on the trade. Due to this risk, some institutional investors like pension funds and mutual funds may refrain from gray market trading.

The gray market for goods thrives when there is a significant price discrepancy for a popular product in different nations. In many nations, there is a substantial gray market for consumer electronics and cameras, because these can be easily purchased online and shipped to any location. Unauthorized dealers may import such items in bulk and despite adding a healthy mark-up, sell them at a price still well below the local cost.

Customers who buy such products for the discount price may face problems in future, and should ensure that they meet local safety and certification standards. Post-sale service and support is another key issue, as authorized dealers may be unwilling to service goods bought in the gray market. Consumers may also occasionally unwittingly buy a gray market product. Some indications that a product is likely to be a gray market one are a price that is considerably lower than that offered by other local retailers, user manuals in a different language and photocopied manuals or duplicated software CDs.

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