Whenever it comes to investing in the stock market, most traders and investors prefer to invest in listed companies in the share market. The primary reason behind this is the high level of safety linked with these shares However, very few people know that there is another category that often goes unnoticed – unlisted shares. These share also present tremendous growth opportunities but are usually considered a bit riskier as compared to listed shares. If you are Looking for how to invest in unlisted companies and tapping the hidden opportunities lying there, this post is meant for you.
What do you mean by unlisted shares?
An unlisted share or security refers to a financial instrument that is not traded on a conventional exchange as it does not meet listing prerequisites. The trading of unlisted shares is performed on the over-the-counter (OTC) market and they are sometimes known as OTC securities. Market makers, or dealers, enable the buying and selling of unlisted securities on the OTC marketplace.
According to the top brokers in India, unlisted shares are typically issued by smaller or new companies that are unable to comply with the listing requirements stated by the stock exchanges, such as market capitalization brinks or a readiness to pay the listing charge, of an authorized exchange. Moreover, as they are not traded in stock exchanges like BSE and NSE, unlisted securities are found to be sometimes less runny than listed shares. Unlisted stock can be chased via pink sheets or on the OTC Bulletin Board.
Types of Unlisted Securities
The most widely preferred unlisted financial instrument refers to the common stock. Most of these unlisted stocks are traded on the OTC marketplaces. Other instruments may include:
- Money stocks
- Corporate bonds
- Government securities
- Derivative offerings like switches, etc.
How to invest in unlisted companies or trade in unlisted shares?
There are multiple ways to opt for when it comes to trading in unlisted shares. Some of them are described below:
Invest in new businesses and intermediaries through the top 10 stock brokers in India
A pre-IPO firm is presently not listed but hopes to get listed in near future. So, it is great to invest in pre-IPO companies. The company shares made their way directly into your Demat account due to the off-record trading without any participation of the exchange. The most important investors and traders need to keep in mind is to choose a reliable intermediary, i.e., someone who can effectively help you do the transaction and avoid any counterparty dangers.
On the other side, you can also choose to invest your money into unlisted firms that boast great potential for multi-fold growth in the future. These companies may not be known to many, but they feature the opportunity to accrue profits and growth in the coming years. In a majority of start-ups, the minimum amount for investment amount is capped at nearly Rs 50,000 and then only the stocks will be transferred into your Demat account.
Purchasing ESOPs directly from employees
Some stockbrokers in India help you contact the workers of organizations who may be willing to sell their shares at a fixed price after a prearranged period. This is another popular of invest in unlisted shares of top companies.
Buying stocks straight from promoters
If you are looking to invest a considerable stake in a company, you can also choose to consult a reliable investment bank, broker, or wealth manager who can help you understand how to determine the share worth of an unlisted company. Moreover, they will help you contact the company’s promoters unswervingly and present you with a list of unlisted firms in India as of now. Such deals are widely known as private placements.
Invest in PMS and AIF programs that are based on unlisted shares
PMS or Portfolio Management Systems refer to professionally managed investment collections. In such a system, the portfolio manager vigorously alters the weight and constitution of the portfolio on the basis of the leading market trends to optimize the investors’ eventual returns. An investor can yield the paybacks of investing in unlisted shares in India via PMS programs that leverage unlisted shares under their investment strategy. This is considered a lot safer than direct buy due to the following reasons:
- Option to diversify the risk across portfolio ingredients
- The portfolio manager eliminates and includes stocks based on their performance.
- Though the investment in unlisted shares can be very advantageous, such investments also post a high degree of risk as well. Some of them are :
- Illiquidity
- Loss of capital
- Not able to get dividends
- Risk of weakening
Thus, it is suggested to take any such investment decisions carefully and it would be better if you consult an experienced and reliable wealth manager before proceeding further.
You may also like to read: why do gold rate fluctuate in India
FAQs
What type of taxes are levied while investing in unlisted companies?
The taxable fraction for long-term capital gains from investing in unlisted firms is capped at 20%. An investor is subjected to an indexation advantage, where one can include the cost of inflation to simplify the taxation. The allotment period usually stays for at least 2 years.
What kind of firms are generally found under the unlisted category?
A majority of pre-IPO firms are generally companies in the initial stage of their growth. It is necessary for an investor to ensure that the due diligence conducted for such firms is arduous and detailed. There is always a space for lack of transparency or inadequacy of information in such types of companies.
Why would you categorize unlisted stocks as illiquid implements?
Unlisted companies as considered high-risk instruments as they can be enchased only when:
- The stockbroker has another buyer for the selected stock.
- Option to sell the stocks during IPO release
If neither of the two happens, your investment will be stuck.
Where can I see my unlisted shares after their purchase is done?
Any unlisted security or share that is bought reflects in your Demat account upon a successful transaction.
Is it feasible for NRIs to invest in unlisted companies?
Yes. Similar to domestic investors, NRIs can also invest in unlisted shares. For those who want to buy repatriable shares, it is necessary to have their intentions clear to the RBI by thorough reporting.
