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  • The gray market is an "unofficial market" where stocks are purchased and sold before they're available to the general public, according to Investopedia. This type of trading frequently occurs outside of the United States. During these transactions, the official transaction can't be completed until the books are officially opened. The two most common ways to purchase stock are through an investment broker and your employer (when they're opening a new company.) However, before purchasing stock in the gray market, it helps to have a few tips.

    Investment Brokers

    One method for accessing stocks on the gray market is partnering with your investment broker. The broker connects buyers and sellers to purchase gray market stock for an agreed-upon price. However, these transactions are like a handshake deal. They can't be made official until the stock is offered to the general public. In these cases, all parties are agreeing to honor their word. If the buyer or seller changes his mind, there isn't any recourse for either party.

    Employer Stock

    Another way to access gray market stocks is working for a parent company that has opened a new company. Existing employees may have an opportunity to purchase stock in the new company. For example, the stock may not be offered to the general public until existing stock holders (within the company) have a week to purchase stock. This would be considered purchasing stock in the gray market.

    Drawbacks of the Gray Market

    Although purchasing gray market stocks provides earning opportunities, there are also drawbacks. The purchase price is based on the expected market price once the stock goes public. This may work out well for the purchaser (if the stock price is higher) or may work out against their favor (if the stock price is lower then expected. Also, the deal has the potential to fall through, which isn't as likely when purchasing normal stock. Work with your investment broker to evaluate the risk before purchasing stock on the gray market.

    Source:

    Investopedia: Gray Market

    Practical Stock Investing: Investing in Gray Market Stocks

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