Investing in unlisted shares is becoming a new fad, for the deal poses higher remunerative gains compared to listed stocks. However, the game is exclusively favorable for investors who can afford to stomach the steep risks involved here. Unlisted shares, to begin with, are the shares of companies that have not yet listed themselves on a stock exchange. Hence, the transactions of the domain are concerned with a close market, where things are less transparent in contrast to listed shares. To boot, listed enterprises can also issue these stocks when the circumstances suggest and which are yet to be registered on the exchange. Unlisted stocks have their gains and cons, which we shall walk you through here. Get going!
Benefits of buying unlisted shares
Here are the main upsides of unlisted share buy that renders them covetable financial security, despite the risks:
- Risk diversification: Unlisted shares come across as a worthwhile option for diversifying the risk factor of your investment portfolio. These equity securities avail commendable returns, and the companies usually look forward to listing themselves down the road.
- Low liquidity: The illiquidity of unlisted shares causes their undervaluation, since, demand for these equity instruments is less. Many opportunistic folks and investors capitalize on this feature and purchase unlisted shares.
- Low volatility: As these shares hold less liquidity, the volatility concerns plummet to a significant extent compared to listed shares. The prices here do not undergo rigorous fluctuation, and their demand and supply as well are not backtracked regularly.
Losses of buying unlisted shares
Following are the downsides of investing in unlisted shares:
- Capital loss: The major risk that looms with the investment in unlisted stocks is the risk to your capital in these pre-IPO companies.
- No fair share prices: Since these shares are not listed on the stock exchange, they are pretty far from the regulations of SEBI and do not come with a fair stock price. Rather the interested folks have to consider a trade-off for setting one.
- Illiquid instrument: The illiquidity of these stocks makes it tough to redeem them for cash smoothly, and unlisted company share priceis decided as per the requirement of buyer or seller.
What are the things to consider when buying unlisted shares?
Investing in unlisted stock is fraught with risks however, you may heed the following precautions if you proceed in it:
- Each pre-IPO company might not have the potential to make it to a business-apex so, you will be walking a tightrope.
- Taxation levied on these equity instruments is far higher as opposed to listed stocks.
- Demat account charges are, specifically, set for investing in shares of unlisted companies.
- Less information available on the unlisted stock price trends makes it tricky to set a fair share price.
- In case the company is unable to scale shortly, it would get challenging to sell off unlisted shares.
These advantages and disadvantages will assist you in deciding the right thing. You can weigh all these factors and find what’s in it for you.