The term ‘unlisted shares‘ refers to an alternative form of investment. It gives investors a chance to participate in the growth of a company before it goes public. In other words, unlisted shares are the shares of companies that are not yet listed on stock exchanges, but they may be planning to go public in the future through an Initial Public Offering (IPO).
While it is a lucrative way to invest early, whether or not it yields profitable outcomes depends on several factors. This blog covers key facts about unlisted shares, their benefits, and risks, how smart investors make money through them and important pre-investment considerations. Read on!
About unlisted shares and why do investors buy them
Unlisted shares are equity shares of companies that are not listed on public stock exchanges. These shares belong to private companies that are at this stage have not yet gone public, but are operating and growing and may go public in future. Their unlisted shares are traded privately over-the-counter between investors, through platforms or via intermediaries. Pre-IPO shares carry potential for high gains but they also have high risks.
Unlisted shares are bought for their potential of fetching high returns in the future. The shares allow investors to diversify their portfolio, giving an opportunity for early access to high-growth companies pre-IPO. Beyond that, some investors may want to support businesses they believe in before the wider market validates their vision.
Benefits and risks associated with unlisted shares
As mentioned above, with unlisted shares, investors can be a part of the growth journey of a company earlier than its shares are traded publicly. If the company becomes successful, the value of the initial investment made can grow noticeably upon its IPO.
As unlisted shares are not traded daily on stock exchanges, they are usually less exposed to short term volatility of the market. Investing in stocks before they get widespread public attention and resulting hype may help investors find better prices. Also, investing in companies and sectors not available on public markets gives investors a chance to broaden their existing portfolio.
That said, unlisted shares are not without cons. Without an active public market, selling the shares may become time-consuming and difficult. There’s no guarantee that the company whose shares have been bought will go public or its IPO will become successful.
Since prices are based on negotiations privately and demand and supply, the shares may come with price transparency issues. Another issue is that investors invest with limited financial information which may affect their overall decision and the resulting outcome.
Key things to consider before investing in unlisted shares
Because these shares are not traded on stock exchanges, investors should review the company, its fundamentals, financial performance, corporate governance among other essentials before investing. Investors should maintain proper documents for all transactions and adhere to all tax compliance requirements.
Since when a company whose shares have been bought will go public is uncertain, the investment here requires a long time horizon. For all the inherent risks and challenges associated, every investor must assess their risk tolerance before investment. A wrong financial decision may lead to considerable or partial loss of capital.
Concluding remarks
What you gain from the purchase of unlisted shares depends on the company’s growth and its listing prospects. While the shares provide a great opportunity to make wealth over time, it’s important to understand the risks that come with it and accordingly match the investment with your own financial goals and risk tolerance.
Please click here to learn more about unlisted shares and investing in them.
Disclaimer: Please note that this article is for informational purposes only. It does not provide investment advice of any kind. Please consult with a qualified investment advisor before making any type of investment decisions.