Shares of reputable and famous companies listed on stock exchanges are some of the most popular investment options in the stock market. But have you ever wondered about investing in unlisted shares?
Unlisted shares are shares of private companies that are not yet listed on stock exchanges. The idea of investing in unlisted shares might be tempting because of the potential for higher returns and portfolio diversification, but it is also associated with certain risks and challenges. If you are looking for a higher growth opportunity, you may consider purchasing unlisted shares.
Continue reading this blog to gain detailed insights about how to buy unlisted shares, their meaning, benefits, and more.
What are Unlisted Shares
Unlisted shares are financial instruments traded on over-the-counter (OTC) exchanges rather than regular stock exchanges. These shares are usually listed in companies that are smaller in size and fail to meet the listing requirements. They are meant for trading on the stock exchanges.
SEBI (Securities and Exchange Board of India) is the main regulating body when you are investing in any listed companies, whereas trading in unlisted shares is unregulated and involves high risks.
Unlisted shares belong to startups, pre-IPO organisations, private equity funds, and others, thereby enabling buyers to take part in early-stage ventures. Through unlisted shares, investors gain the equity of private corporations before they turn public.
Benefits of Investing in Unlisted Shares
Investors who prefer unlisted shares invest because of the advantages they offer. Here are some key benefits of investing in unlisted shares:
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Gain Access to Opportunities
Investing in unlisted shares indicates investing in expanding companies. For instance, if you have already invested in a company before it got enlisted in public entities, you would then have become a part of its early success as it continues to expand in the industry. As the company expands and establishes its market presence, your returns on investment also increase.
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Yield Higher Returns
Unlisted shares may yield higher returns in comparison with listed shares in certain market situations. For example, successful startups can show rapid growth trends after going public and experience a rapid surge in stock prices. This kind of growth is a prime characteristic of unlisted shares, especially when a company is expanding.
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Negotiable Stock Prices
The prices of unlisted shares are often negotiable, unlike shares listed in the stock market, where prices are determined by demand and supply. For instance, if you are planning to invest in a tech startup, you can get better deals from the respective founders of the company. This lets you get a better entry price than you can opt for in the open market.
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Diversification of Portfolio
Unlisted shares offer valuable exposure to various industries and high-growth sectors, helping to diversify an investment portfolio. For example, purchasing stocks in traditional sectors such as manufacturing or banking can be complemented with investment in unlisted companies from industries that include tech or food delivery.
This kind of diversification thereby lowers risk by spreading your total investment across different sectors.
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Less Market Volatility
Fluctuations in the daily market affect listed shares more in comparison with unlisted shares. For instance, during phases of a market downturn, unlisted companies face fewer changes in prices when compared with companies listed on public exchanges. This thereby helps stabilise your investment, especially when there is uncertainty in the stock market.
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Support Entrepreneurs and Innovative Companies
If you continue investing in unlisted shares, you are essentially supporting entrepreneurs and innovative companies. For example, if you invest in a biotech startup with a history of developing lifesaving medicines, you invest in advanced and innovative healthcare solutions that disrupt the market, giving you exponential returns.
Why Investors Need to Consider Unlisted Shares
- Early Entry into High-Growth Companies: Investing in unlisted shares allows you to gain early exposure to startups and pre-IPO companies, potentially offering substantial returns if the company grows or gets listed.
- Portfolio Customisation: Investors looking to customise their portfolios with a mix of traditional and alternative assets often turn to unlisted shares to balance risk and reward.
- Attractive Valuations: Unlike listed shares driven by market sentiment, unlisted shares are often more reasonably valued, giving investors a chance to buy into companies at lower prices.
- Strategic Long-Term Investment: Unlisted shares suit long-term investors who are willing to hold onto their investments patiently until the company either lists publicly or achieves substantial growth.
- Institutional Participation: Even reputed institutional investors and private equity firms invest in unlisted companies, indicating the strength and legitimacy of this investment route.
How to Buy Unlisted Shares in India?
Purchasing unlisted shares in India is rewarding yet a risky opportunity. If you are an individual with a high-risk appetite, you can continue purchasing unlisted shares in India following different methods. Here are some popular methods you should check out:
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Investment in Startups and pre-IPO Companies
You can decide to invest in organisations that have a high chance of getting listed later on. These are popularly known as pre-IPO companies. Once you invest, the shares get transferred to your demat account. These transactions take place outside the formal exchanges.
As an alternative, you can also invest in startups with high growth potential. The minimum amount you can invest in this step for purchasing is approximately ₹50,000.
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Purchasing ESOPs from Employees
By contacting some brokers, you can purchase shares directly from employees interested in selling their Employee Stock Ownership Plan (ESOP) shares. These shares are usually sold out at a predetermined price but only after a certain lock-in (vesting) period. This is a popular alternative option for purchasing unlisted shares in well-recognised private companies.
After the vesting period, employees often sell their holdings at a much lower price than market rates. During this time frame, being an investor, you can purchase their shares at a discounted price.
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Purchasing Shares Directly from Promoters
If you are willing to invest a significant amount, approach brokers or investment bankers to purchase shares from the respective promoters of companies. Promoters are the owners, founders or majority shareholders of a company.
Brokers can assist you in determining the share price of unlisted companies and establish your connection with promoters. This way, you can also gain access to several investment opportunities.
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Investment through PMS or AIF Schemes
Alternative Investment Funds (AIF) and Portfolio Management Systems (PMS) are popular investment portfolios managed professionally. Under these schemes, managers buy and sell shares considering market trends. These schemes often invest in alternative assets, including real estate and unlisted shares, as part of their strategy.
Investing via these schemes is a safer investment strategy rather than direct investment. Portfolio managers can thus also manage risks through adjustments in portfolios based on company performance and market trends.
Conclusion
By now, you must have a clear understanding of the different methods to follow about how to buy unlisted shares. Alongside this, it is also important to familiarise yourself with the risks associated with investment. As unlisted shares are not traded on stock exchanges, they are less liquid than listed shares.
Additionally, these shares are prone to market volatility. However, despite these shares’ risks and challenges, following the correct methods of investment in unlisted shares can yield you higher and more attractive returns.
Purchasing and selling unlisted shares is not difficult if you know how it works. Open a demat account with Torus Digital and continue exploring the world of unlisted companies.
