How To Buy Unlisted Shares?

If you look at the equity landscape, it is relatively easy for you to start investing in listed shares. However, once your portfolio of listed stocks is large, you may also consider exploring investing in unlisted shares. To move from listed to unlisted shares is like switching from driving a four-wheeler to driving a two-wheeler. Driving a two-wheeler comes with certain risks and advantages, and it is always better to understand them before making the switch.

In this article, we help you understand what it means to make the switch. We will cover the basics of unlisted shares, explain the different options under them, how to get started with unlisted shares, and the risks and rewards of investing in them.

Understanding Unlisted Shares And Securities

A listed share is one that you can find on the stock exchanges in India: the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). There is no point in guessing; the unlisted shares and securities are those that are not listed on the exchanges. These shares are issued by private companies or firms that have not met the listing requirements or have not chosen to go public yet.

Are you still wondering - what exactly falls under unlisted shares? Let us cover that in the next section.

Getting Started With Unlisted Shares And Securities

Here is what is included under unlisted shares:

• Shares Of Private Companies: These represent ownership in a company that has not yet undergone an Initial Public Offering (IPO). It may include startups, well-established private businesses and Small and Medium Enterprises (SMEs).
• Pre-IPO shares: Shares offered to select investors before a company goes public. 

Whatever options you are interested in, you can read more about them before investing in them.

Learn How To Start Investing In Unlisted Shares In India

Now that you know the basics of investing in unlisted shares, you may be tempted to invest in them. But how do you invest in them, given that they are unavailable with your stock broker? There are a handful of options, and we cover them here for you. Here are different ways to invest in unlisted securities in India:

• Banks And Brokers: Not all, but some banks may help you with unlisted shares and securities. They work with trustworthy third parties who can help you invest in unlisted shares with proper guidance. They can help with due diligence and navigating the complexities of the unlisted market.
• Angel Investing Platforms: Some platforms in India allow you to invest in startups and purchase unlisted shares as an angel investor. Who are angel investors? They are investors who invest in early-stage companies with high growth potential. They provide capital to startups or young businesses that are too risky for traditional lenders or investment firms. 
• Wealth Management Companies: Financial advisors or wealth management companies that have good connections and experience in unlisted securities can connect you with potential investment opportunities. 

Understanding Risks

Let us look at the risks of investing in unlisted shares. Here are some of the risks associated with investing in unlisted shares and securities:

• Liquidity Risks: With listed shares, you can press a few buttons and sell your stocks. However, that is not the case with unlisted shares. Let us assume you purchase startup equity, but unless someone is ready to buy it, you cannot exit your investment and finding a buyer can be challenging at times. 
• Higher Failure Rate: The listed companies have a historical track record that you can analyse and study. However, unlisted companies may have limited historical records available to the public to analyse. Since they are in the early stages of their journey, the chances of failure are higher. 
• Regulatory Risks: Unlisted companies are subject to less regulatory scrutiny compared to publicly traded firms. It can lead to governance issues and an increased risk of fraud or mismanagement.
• Valuation And Exit Challenges: Perhaps the most significant risk is that you cannot know how to evaluate the true worth of unlisted companies, as it is complex and subjective, often requiring professional expertise. Many investors pick the right unlisted company at an incorrect valuation, which leads to poor investment decisions.

Understanding Rewards

Are you doubtful now - after going through the risks? Hold on, please finish this section to understand the rewards associated with unlisted shares before making the final call:

• Potential For High Returns: Unlisted companies, especially startups and early-stage ventures, often have significant growth potential. Investing in these companies can yield high returns if the company succeeds and grows rapidly. You may have heard of the returns Virat Kohli made after the Go Digit IPO listing. As per reports, he was an early investor in the company and invested around INR 2 crore. On the listing days, his INR 2 crore was INR 8.4 crore - a whopping 4 times returns¹. 
• Access To Unique Sectors: Investing in unlisted securities can give exposure to sectors or industries that are underrepresented in listed markets, such as certain tech startups or niche market players. For example, you won’t find any company in fantasy sports listed but there are many well-established businesses in unlisted space and the shares are available.
• Diversification: Unlisted shares can diversify a portfolio because their performance may not be closely correlated with the broader stock market. It can help you reduce overall portfolio risk.

Conclusion

Investing in unlisted securities can be a rewarding experience, but it requires a well-informed and calculated approach. If you don't have the skill set to pick unlisted shares, it is always better to hire a professional. 

If you want to do it on your own, understand the risks, and conduct thorough research. Once done, you can approach this market with a greater sense of security and potentially achieve your investment goals. To avoid the high risk of unlisted shares and bring balance to your portfolio you can consider investing in fixed-income investment opportunities. Sign up on Grip Invest today to learn more about fixed-income securities.

Frequently Asked Questions On Unlisted Shares And Securities

1. What are the risks of buying unlisted securities?

The risks of buying unlisted securities are limited liquidity, valuation challenges, higher failure rates, and regulatory risks.

2. What are the benefits of buying unlisted securities?

When you invest in unlisted securities, you give your portfolio the option to get higher returns (by taking higher risks). Also, you get access to unique sectors and create a diversified portfolio.

References:

1. CNBC TV18 <https://www.cnbctv18.com/market/go-digit-general-insurance-ipo-a-handsome-4-times-returns-for-virat-kohli-anushka-sharma-19416625.htm>

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