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While many people invest in companies listed in the stock markets, greater awareness about investing in companies that are not part of any stock exchange is required. Investing in such unlisted entities have its own merits and drawbacks. Keep reading to know more about these unlisted securities.
If you like trading in shares, then you are likely aware of listed securities. Listed securities are the shares of the companies that are registered in any stock exchange like NSE or BSE. Once listed in the stock exchange, shares of such companies can be bought and sold through a Demat and a trading account.
But do you know that you can also invest in shares of those companies that are not listed on any stock exchange?
Unlisted Securities
Unlisted securities are not listed on any official body like a stock exchange. This include shares issued by private companies, which cannot be traded publicly. As these securities cannot be traded on the stock exchange like the shares of listed companies, unlisted securities are traded over-the-counter (OTC).
Don’t confuse unlisted securities with delisted securities. Delisted securities are the ones that were once listed on the stock exchange, but presently, they are no longer part of any stock exchange. Unlike unlisted securities, you can’t invest or trade delisted shares through any platform.
Ways to Invest in Unlisted Securities
You can invest in unlisted securities through many options, such as
- Purchasing shares directly from the owners/promoters
- Purchasing ESOP (Employee Stock Ownership Plan) from the employees
- Investing in startups
- Investing in schemes that invest in unlisted securities
- Investing in the listed parent company
- Investing through brokers or online platforms that deal in unlisted securities.
Investment in Unlisted Securities
Institutional investors, large companies, angel investors, and HNI (High Networth Investors) routinely invest in unlisted securities. Such securities can provide high returns depending upon various factors such as a high-priced listing on a stock exchange in the future, promising revenue growth of the company and so on.
However, there is a significant amount of risk involved in investing in unlisted securities, such as-
Lack of Analysing Opportunities
Fundamental analysis of listed companies is relatively easy as a lot of information about them is publicly available on the internet through the firm’s annual reports or DRHP (Draft Red Herring Prospectus).
However, gathering information about an unlisted firm is often difficult as not much information is available to the general public about such a firm. Therefore, you may invest in bad firms or pay a higher price for the securities, which can result in capital loss.
Low Liquidity
Since such companies are not listed on any exchange, you can’t easily sell them if you have urgent cash requirements. You have to wait for the buyer who can offer you the right price for your investments.
Low Flexibility in Investing
You can start investing in listed securities by purchasing as low as one share. However, you will need to buy a lot while dealing with unlisted shares. A lot size can cost you anywhere between Rs 25,000 to Rs 50,000.
Therefore, small investors may find the investment process rigid when dealing with unlisted securities.
Should You Invest in Unlisted Securities?
While your investments in a high-quality, unlisted company can potentially provide you good returns, you can also risk losing your entire investments if the company does not turn out to be as good as you thought it would be.
Therefore, as a retail investor, you can consider allocating a small portion of your investment plan into unlisted securities so that your finances remain unaffected even if the unlisted securities do not give you promising returns.
Moreover, it is better to invest through an experienced and reputed registered broker or financial firm while dealing with unlisted securities.
