Grey Market

What is the 'Grey Market'

The grey market, also referred to as the parallel market, is a market where a product is bought and sold outside of the manufacturer's authorized trading channels. The grey market is where the unofficial trading of a company's shares, usually before they are issued in an initial public offering (IPO), happens. The distribution channels involved in the grey market are legal but are not provided by the original owner.

BREAKING DOWN 'Grey Market'

For example, if a store owner is an unauthorized dealer of a certain high-end electronics brand, the product is considered to be sold in the grey market. If the product is illegal, it would be selling on the "black market." The grey market is an over-the-counter market where dealers may execute orders for preferred customers as well as provide support for a new issue before it is actually issued. This activity allows underwriters and the issuer to determine demand and price the securities accordingly before the IPO.

Typical grey markets are small businesses built by individuals who are not authorized retailers of the goods being sold. These products are usually important goods that are expensive or not available in the country to which they are being sent to. This typically happens when the price of the good produced in one country is significantly higher compared to another country. For example, an entrepreneur would purchase a product where it could be bought cheaply, whether he buys it at retail or at wholesale. After purchasing the product, he would legally import it to another country at a price high enough to yield profit.

Grey Markets VS Black Markets

Grey markets should not be confused with black markets since they have a very distinct difference. Grey markets are imported goods sold purchased at a less expensive price and sold for a higher price. The importation of prohibited and illegal goods like firearms and drugs do not fall under the grey markets. These items are considered to be part of the black market. Goods under the black market are typically products that are smuggled into particular countries to avoid import matters.

Samples of Grey Market Products

Some common goods that fall under the grey market include computer games, automobiles, arcade games, pharmaceuticals, electronic gadgets, stock market securities and textbooks.

A real-world sample of a grey market is evident in the stock market. Investors can purchase securities that are not listed or quoted on a U.S. stock exchange or in any over-the-counter market through the grey market. The grey market does not have market makers placing prices on stocks. Since the securities are not quoted on a regulated system, the bid and offer prices of investors are not collected and transparency of stock prices is removed. This makes it difficult to execute transactions.

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