What is a 'Gray Market'

A gray market is 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 gray 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 popular consumer devices and electronics because these can be easily purchased online and shipped to any location. Other popular gray market products include luxury cars, high-end apparel, handbags and shoes, cigarettes, pharmaceuticals, and cosmetics. 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 from a gray market are a price that is considerably lower than that offered by other local retailers, user manuals in a different languages, and photocopied manuals or duplicated software CDs.

Adverse Impact on Businesses

The size of some gray markets is substantial. Business outside official channels poses challenges for the manufacturers of the goods. Aside from the loss of sales that a company can book directly, the gray market produces risk to brand equity and damages relationships in the formal sales channel made up of wholesalers, distributors, and retailers, whose exclusivity for sought-after goods is weakened.

RELATED TERMS
  1. Gray List

    A gray list is a list of stocks that are ineligible for trade ...
  2. Gray Box

    Gray box is the testing of software with limited knowledge of ...
  3. Unofficial Strike

    An unofficial strike is a work stoppage by union members that ...
  4. Market

    A market is a medium allowing buyers and sellers of a specific ...
  5. Dealer Market

    A dealer market is a financial market mechanism wherein multiple ...
  6. Market Price

    The market price is the cost for an asset or service.
Related Articles
  1. Investing

    Vanguard Predicts European Central Bank QE Will End This Year

    Vanguard expects the ECB to end its quantitative easing program this year.
  2. Financial Advisor

    Fiduciary Rule Grandfathering Gray Area for FAs

    Advisors who change companies after April 10th may lose the grandfathering exemption under the DOL's fiduciary rule.
  3. Trading

    The U.S. Dollar's Unofficial Status as World Currency

    Discover how and why the U.S. dollar emerged as official currency in many foreign countries.
  4. Investing

    A Look At Primary And Secondary Markets

    Knowing how the primary and secondary markets work is key to understanding how stocks, bonds and other securities are traded.
  5. Investing

    The Issuance Procedure of High-Yield Bonds

    The issuance of corporate high-yield bonds can have several advantages over equity. A closer look.
  6. Trading

    The Pros And Cons Of Trading Forex In An Overseas Account

    The Dodd-Frank Act of 2010 could impact whether overseas accounts benefit FX investors.
  7. Investing

    Avoid Hot Stock Tips and Focus on Fundamentals

    Investors should avoid hot stock tips and instead focus on these fundamentals.
  8. Investing

    Brokerage Functions: Underwriting and Agency Roles

    Learning about underwriting and agency roles at a brokerage can give insight into how securities are issued and traded.
  9. Personal Finance

    Top Tips For Year-End Car Buying

    'Tis the season to purchase new wheels, and these tips will help you drive away with the best price.
  10. Trading

    Trading Failed Breaks

    Learn how to capitalize on the predictable behavior of others during breakouts and breakdowns.
RELATED FAQS
  1. What are the difference between gross revenue reporting and net revenue reporting?

    Understand what it means to report revenue as net or gross and which kinds of companies are most likely to use either reporting ... Read Answer >>
  2. What is the difference between a capital good and a consumer good?

    Learn to differentiate between capital goods and consumer goods, determined by how those goods are used, and see why capital ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center