Unlisted shares refer to company shares that are not traded through an authorized stock exchange like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). Therefore, such shares do not operate on the principles governing listed securities, such as price discovery rules and legal trading volume obligations. Sometimes, people confuse unlisted shares with OTC shares. OTC stands for over-the-counter shares, meaning their trades happen privately among brokers, unlike using the public platform.

Unlisted shares vary from listed ones in several ways:

  • Liquidity: The liquidity of unlisted securities is lower than those listed since there are only a few likely buyers or sellers. Finding a buyer or seller at any given time and price can be difficult with respect to unlisted stocks. Additionally, it implies higher transaction costs and longer settlement periods than listed stock.
  • Transparency: When compared to listed securities, investors may not have enough information about the performance, valuation, and prospects of non-listed companies. Simultaneously, such assets may exhibit higher market volatility and greater information asymmetry than public stocks.
  • Regulatory oversight: Unlisted shares are not as regulated as listed ones since they do not have to meet the same standards and requirements as already listed companies. This implies that investors might be less protected or need more protection against fraud, mismanagement, or default by unregistered corporations.

Despite these differences, unlisted shares also have some potential benefits and advantages over listed shares. The following are some of them:

  • Higher returns: As a result of lower valuations and higher growth prospects, unlisted stocks may produce higher returns vis-a-vis listed ones. The value of a company can increase greatly if an investor buys non-listed securities when it is still a small firm that later grows into a mega-corporation or gets publicized.
  • Early-stage investment: Untraded companies may have a competitive advantage in their unique sectors, a consistent customer base, or a strong team of originators and employees. Purchasing untraded shares in such start-ups exposes investors to future industry leaders and disruptors.
  • Portfolio diversification: Portfolio diversification is possible through investing in unlisted shares because they have a low correlation with broader stock market performance. Unlisted companies may have different risk-return profiles, growth drivers, and competitive advantages than listed companies.

Why You Should Buy Unlisted Shares

Unlisted shares can be a good choice for investors seeking better profits, start-up investing, and diversification of their portfolios. However, investment in unlisted shares is also paired with significant risks such as lack of liquidity, disclosure, and regulatory environment. Therefore, the pros and cons depend on the risk appetite of the investors, the time frame of the investments, and the investor’s investment objectives.

How to Buy Unlisted Shares in India

Purchasing unlisted shares in India might not be as simple as purchasing listed stocks. Unlisted shares are not traded on any recognized stock exchange but through private dealers or brokers, who may have their own conditions and terms.

The following are the various methods of acquisition:

  • Start-ups and Facilitators: Invest in pre-IPO firms or start-ups through trusted intermediaries, ensuring the shares are transferred into your Demat account.
  • Employee Stock Option Plans (ESOPs): Purchase directly from employees who sell their vested options.
  • Through Promoters: Engage with investment banks/brokers who can facilitate private placements with the company’s promoters.
  • PMS and AIF Schemes: Consider Portfolio Management Systems (PMS) or Alternative Investment Funds (AIF), which include unlisted shares in their portfolios.

Now that you know how to buy unlisted shares in India, let’s understand what kind of shares you are buying. Most privately held companies issue common stocks as part of their ownership structure.

Common Stock: A Key Component of Unlisted Shares

Common stock is a security that represents ownership in a corporation. Common stockholders can vote on important business decisions, such as electing directors, approving mergers and acquisitions, and declaring dividends. They are also entitled to receive dividends paid out by the company, if any. Further, their share value increases through the company’s capital appreciation.

Most privately owned organizations issue common stock to compensate founders, workers, investors, and other stakeholders who want to invest funds for equity in the organization. This is not publicly traded on an exchange platform like the BSE or NSE.

The worthiness of ordinary shareholding units issued by privately traded firms can depend on several aspects, including the firm’s performance record, market potential, edge over rivals, future opportunities presented, etc.

One of the well-known companies that began as private businesses before they went public is Flipkart.

Flipkart: Flipkart is one of the largest e-commerce companies in India. It was founded by Sachin Bansal and Binny Bansal in 2007. It rewarded its founders, employees, and investors with common shares that appreciated as the company grew. In 2018, Walmart made a record-breaking $16 billion purchase of Flipkart, one of the largest e-commerce deals ever.

Conclusion

Investing in unlisted shares may be a strategic move for investors looking for higher returns, exposure to start-ups and portfolio diversification. However, as you venture into buying unlisted stocks, do not forget the possible inherent rewards and risks.

If you want to learn more about shares or want to start trading, visit Share.Market and start trading with us today. We provide experienced guidance to individuals looking to buy cheap stocks, the best cheap stocks, or the best unlisted shares; we have something for everyone.