Are listed shares the only form of investment? If you are looking for an answer, you are at the right place! There are many forms of equity shares, like unlisted shares which you can opt for to add more diversification to your portfolio. You might ask, what are unlisted shares and how to buy unlisted shares? This blog will answer all your questions, so read on!
What are Unlisted Shares?
In simple terms, unlisted shares are financial securities that are not traded on the stock exchanges because they do not meet the necessary criteria to be listed on the exchange. In contrast, listed shares are the shares that are available and tracked on formal stock exchanges.
You can buy shares online easily in the case of listed shares while the same is not true for unlisted shares. Unlisted shares are usually issued by small or new firms because they may not be able to comply with the requirements of the stock exchange.
These shares do not have any safety nets or constant monitoring by the Securities and Exchange Board of India (SEBI), unlike listed shares that are typically bound by SEBI regulations.
While unlisted shares come with more risks, the growth and rewards may provide bountiful opportunities to investors. You should know that unlisted shares are illiquid and usually difficult to trade, unlike listed shares.
You might ask how to buy shares of an unlisted company if it is nonexistent on the market. Find your answers right below.
How to Buy Unlisted Shares?
These shares are usually available for trade on over-the-counter (OTC) markets which are also known as the grey market. Thus, these shares are also referred to as OTC securities.
Since you can not purchase these stocks on the stock exchange, below, we have listed a few means via which you can trade and invest in these stocks.
1. Starting Pre-IPO Investments
A Pre-IPO company is a company that is currently unlisted on the stock market but aims to launch or list its shares in the future. When pursuing this route, all stocks will be delivered to your demat account despite these investments being a part of the grey market.
There is no reason to worry as long as you have chosen a trustworthy intermediary. It is time to tell you the biggest plus point of this method!
You might have observed that a plethora of start-up companies have a great potential to multiply their profits and show signs of multi-fold growth. You can invest in these off-radar companies and witness returns on them by buying their unlisted shares.
To get these pre-IPOs credited to your demat account, you will usually have to invest a minimum amount of 50,000 INR. So, the next time you wonder about “how to invest in unlisted companies with great potential,” you should consider this option.
2. Buying ESOPs from an Existing Employee
Sometimes companies provide a certain percentage of stock ownership to their employees. If you want to avail of them, you can contact a broker or join platforms that can help you get in touch with these employees.
Typically, brokers act as intermediaries and offer you employee stock options (ESOPs) at a predetermined price. Keep in mind that sometimes ESOPs are the only way to buy unlisted shares of certain companies.
3. Investing in PMS and AIF Schemes
You might have noticed that many financial institutions often offer Portfolio Management Services. These portfolio managers dynamically vary your portfolio constituents with the aim of maximizing your returns.
These schemes often include unlisted stocks as a part of the portfolio management company’s investment strategy. It does not end here! The PMS scheme is a much safer option than the rest because the risk is diversified across the different constituents of the portfolio.
Secondly, the portfolio manager ensures that the stocks get added and removed based on their performances. Since portfolio managers regularly monitor the stock performance, the chances of major losses are slimmer.
However, these schemes have certain pitfalls, including the risk of dilution and insufficient dividends. In a worst-case scenario, there also can be a loss of liquidity and capital.
4. Crowdfunding and Angel Funds
Before we get into the specifics of how you can use this technique, let us briefly explain these terms. An angel investor is an investor who funds coming startups in exchange for royalties or stakes in the company. In contrast, large groups of crowdfunding investors fund startups to obtain stock ownership.
When making large investments in these unlisted companies, you can join and use crowdfunding platforms or be an angel investor.
5. Purchasing Stocks Directly from Their Promoters
In this route, you will dabble in private placements of shares. Do remember that this is the least used method as it can prove to be quite expensive and is not readily accessible for retail investors. This method is best preferred by High Net-Worth Individuals and Institutional investors.
You are required to find an investment bank or a broker that facilitates this option for investing in unlisted shares. Because of its complex nature, other options are more approachable to invest in unlisted shares.
We’ve walked you through the question of how to buy unlisted company shares. The answer is simple – follow any one of the above-listed methods and kickstart your investment journey!
Although there isn’t much information available about unlisted shares in the market, ensure that you do as much research as possible before putting your money in.
Thoroughly investigate and inspect the intermediaries involved to ensure you do not face any surprises later!