What Is the Gray Market for Stocks?

If you got in on Facebook when it traded on the gray market, you're probably still celebrating.

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From trendy Grey Goose Vodka and “Vogue” magazine’s perpetual love affair with the color to the TV show “Grey’s Anatomy,” the color gray is considered trendy, sophisticated and classic, but the first over-the-counter financial securities market specializing in trading initial public offerings and other stocks is anything but classic. The gray market is young, brash, volatile and unorthodox – the ideal risk for investors who love cutting-edge financial dealings.

What Trades on the Gray Market?

Spell it with an “e” or an “a” or call it by its other name -- gray sheets – the gray market is unlike other exchanges. This unregulated marketplace was established to trade stocks waiting in the wings to be listed on larger exchanges or to trade those unable to qualify for the big exchanges. Not every stock is associated with an IPO; some gray market stocks are issued by start-up or spin-off companies looking to test the waters before spending the time and money it takes to woo a major exchange. You’ll also find fallen angels on the gray market -- stocks once traded on major exchanges such as the Nasdaq that may have suffered financial misfortunes or failed to meet Securities and Exchange Commission requirements.

Who Trades on the Gray Market?

Only people with lots of money and an attraction to risky stocks wind up as players on the gray market. Investors trade stock via unique “private trading platforms” such as SharesPost, SecondMarket or simply a consortium of accredited investors, explains the website Stock Rock and Roll. Since securities traded on the gray market are not registered with the SEC, not every investor is interested in these types of financial deals. Investors can also expect to ante up healthy commissions that are higher than those charged for transactions on bigger exchanges when they dabble in the gray market for stocks.

There’s Little Structure

Given the unique nature of the gray market, don’t look for conventional operations if you jump in and don’t look for the prospectuses, data or trade history associated with more-traditional stock exchanges. The gray market avoids advertising, and you won’t find frequent trading activity records, either. In many cases, stocks on the gray market are too new to have histories. Absent structure, gray market products share commonalities: They’re backed by business plans, many deals are struck with verbal agreements and principals involved in gray market stock trading belong to a small, intimate community. Further, when accredited investors agree to seal a deal, everyone acknowledges that there’s little legal recourse available to parties if the stock crashes and burns.

Some Make it Big

Some big-name stocks have been traded on the gray market before making it to the New York Stock Exchange, Nasdaqor top international stock exchanges. The accredited investors with enough foresight to invest in these stocks are perceived as shrewd investors. For example, before Facebook shook up the world with an IPO that debuted on the Nasdaq in May 2012, folks dabbling in gray market stocks were already familiar with Facebook and were trading it, so the brouhaha associated with Mark Zuckerberg’s launch was old news to these accredited traders.