How to Buy and Sell Shares of Unlisted Companies

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Synopsis:

Investing in unlisted Indian companies involves purchasing shares in startups, pre-IPO companies, or directly from companies through brokers. This can offer high growth potential and diversification but comes with certain challenges. Consider a company’s valuation, finances, and liquidation processes before investing.

Investment in a company’s shares is exciting because it promises high returns. Have you ever tried investing in shares not listed on the stock market? These are called unlisted shares because they are neither listed in the stock market nor registered with the Securities and Exchange Board of India (SEBI). However, you may ask why one would want to invest in such shares. The answer is because of the wide profit margin.  Read on to find out everything about unlisted shares.

What are unlisted shares?

To begin with, unlisted shares are the financial assets of a company that can be traded in the over-the-counter market. They are also known as over-the-counter shares. What differentiates them from listed shares is that they are not listed with the stock market and are not registered with SEBI i.e. not regulated according to the SEBI rules. They are mostly available on private platforms as opposed to public portals such as the stock market.

The biggest drawback for shares of unlisted companies is the huge profit margins that attract investors, even with the possibility of high risks.

Types of unlisted financial instruments

Now that you know what unlisted shares are, here is a list of different types of unlisted financial instruments that are available:

  • Common Stock
    A common stock is a representation of your share in the company. Therefore, if a company has 100 common stocks and you buy 1 common stock, you then have a 1% share in the company.
  • Penny Stock
    As the name suggests, these are stocks bought at penny rates, hold less value, are subject to high market risks and often generate less profit.
  • Corporate Bonds
    Owning corporate bonds of a company means that you will receive a certain interest (periodic) until the bond matures, and after that, your initial investment will also be returned. Companies offer corporate bonds to raise capital.

How to invest in unlisted companies?

Here is how you can invest in top unlisted companies in India if you are on board:

  • Pre-IPOs
    You can invest in companies that are preparing to go public by offering future Initial Public Offers (IPOs). This ensures better returns as you become an early investor.
  • Explore Startups
    The Indian startup scenario is huge, and it provides a wide playfield for making investments. Additionally, your shares are directly credited to the demat account, and you can start with a small amount of money.
  • Direct Purchases
    If a company interests you, you can directly purchase its shares. This can be done through reliable brokers or investment bankers.

How to buy and sell unlisted shares in India? 

Investors interested in these shares often wonder how to buy unlisted shares in India. The simplest way to move forward is to contact investment bankers/brokers or wealth managers. They have expertise, exclusive deals and better networking that can help you buy unlisted shares. You can explore ESOPs, startups and pre-IPO companies to buy unlisted shares online.

There is a wide scope for you with angel investors, as they can help you connect with startups.

Pros and cons of investing in unlisted companies 

Before investing in an unlisted company, consider these pros and cons to make an informed choice:

Pros

  • High growth potential: The chances for profit margins are high in a company at an early stage.
  • Diversification: A way to step beyond traditional shares.
  • Lower valuations: Option to acquire shares at low rates.

Cons

  • Liquidity: It is difficult to sell unlisted shares because it is liquid.
  • Regulations: SEBI does not regulate unlisted shares.
  • Valuation: Lack of data often makes it difficult to find the correct valuation of shares.

Things to consider when buying unlisted shares online

Unlisted shares come with their own sets of attractions. If you are keen on with investing in unlisted shares, here is a list of aspects that you must consider:

  • Valuation: Do not get carried away with unlisted shares offered at lower rates if they do not offer a high valuation in the future.
  • Company finances: Research a company’s finances to evaluate the share’s prospects.
  • Liquidation: Check the process of selling unlisted shares to avoid getting stuck with illiquid assets.
  • Technical meanings: Investing in unlisted companies requires you to be well versed in trading concepts, such as IPO meaning, liquidation, and bear and bull markets.

Conclusions

In conclusion, investing in unlisted shares presents unique opportunities and challenges. While the potential for higher profit margins is attractive, it is essential to remain aware of the risks, such as liquidity issues and valuation difficulties. Investors should exercise discretion and consider consulting financial experts to gain a comprehensive understanding of trading shares in unlisted companies. By doing so, you can make informed decisions and navigate the complexities of this investment avenue effectively.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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Frequently Asked Questions

What kind of taxes are associated with investing in unlisted companies?

Answer Field

If you have stocks in unlisted companies held for over 2 years, they come under Long Term Capital Gains, which are taxed at 20% and can be adjusted for inflation.

Where can I see my unlisted shares after I purchase them?

Answer Field

You can see your unlisted shares on your demat account as they are directly transferred to your linked account, which is one of the most attractive features of unlisted shares.

What type of companies would you typically find in the unlisted category?

Answer Field

The unlisted category usually comprises emerging, startups and pre-IPO companies. They offer shares to raise capital before going public in the stock market. While investing in these companies, ensure to conduct thorough research.

Is it safe to invest in unlisted shares?

Answer Field

Yes, investing in unlisted shares is safe, and there is great scope for diversification. However, due diligence is required when investing in unlisted shares because they are not regulated by SEBI and there is a lack of available data. It is highly recommended that you do your research and only then make an investment.

Why would you classify unlisted stocks as illiquid instruments?

Answer Field

Unlisted stocks are considered illiquid instruments because they are difficult to sell/liquidate. You would either need a broker or wait for the company to go public so that you can sell your stocks in the stock market; till then, your stocks will remain illiquid.

Is it possible for NRIs to invest in unlisted shares?

Answer Field

As an NRI, you can invest in unlisted shares, but these will be non-repatriable i.e. shares will not be permitted to move out of India. NRIs need to get approval from the RBI to move shares outside India. Thus, ensure that you are aware of the legalities before you invest in unlisted shares.

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