You must have heard about fluctuating unlisted share price or someone boasting about the huge money they made buying unlisted shares. These are very common terms used in the stock market, but if you are not even a bit aware about unlisted shares and worry about losing money, then this blog is just what you need. We have compiled a list of 10 benefits and drawbacks to buying unlisted shares. These points will help you gain a deeper insight into what unlisted shares are and how likely you are to make a profit after investing in them.
Brief Glimpse Into Unlisted Shares
The unlisted shares are shares of private companies that are not yet offered for sale in the IPO (Initial Public Offering). Or it can be simply said that the companies that have not yet gone public are unlisted or pre-IPO shares. To buy unlisted shares you will have to choose theOTC (Over The Counter) since unlisted shares are not traded on major exchanges, unlike listed shares.
Let us learn the benefits and drawbacks of best unlisted shares to invest:
Benefits Of Investing In Unlisted Shares
The advantages to buying unlisted shares are many which can help you gain huge profits.
Diversification Of Risk
If you are someone who wants to diversify your risks associated with investments, you must search for the best unlisted shares to invest in. The unlisted shares price provides different risk dynamics, complementary to someone who has invested inIPOshares and can offer similar to better return potential compared to listed shares. Moreover, there are chances that these shares will go public in future which can lead to a substantial gain.
Negotiable Share Prices
One of the greatest benefits to buying unlisted shares is their negotiable price, largely due to the limited buyers andsellersand limited companies offering best unlisted shares to invest. So clearly, the competition is low when investing in unlisted shares and therefore unlisted shares price are comparatively negotiable.
Probable Undervaluation Rates
This advantage is related to unlisted shares being illiquid. Due to low liquidity in best unlisted shares to invest in, only a few investors are willing to invest in them for a longer time period.Due to low competition and participants, the unlisted shares price has probable undervaluation rates and if you have knowledge of investing you can earn huge profits by purchasing them at an early stage before they get a valuation and become expensive.
High Growth Investments
If you are willing to let your money stay in the market for an extended time period, you canbuy unlisted sharesand reach high-growth investments. Confused how? Since unlisted shares are often issued by smaller size companies that are yet to reach a level where they can go public to avail capital funds. On a good note, you can stay invested in the company through its growth and yield high returns when it lists on the exchange market.
Massive Profits
One of the major reasons to invest in the best unlisted shares is to get a good return on investment (ROI). When you buy unlisted shares there is always a chance that the company you invested in becomes listed and increases its share prices, from what they were originally.
Downside Of Investing In Unlisted Shares
The goods of unlisted shares can be tapered down by their downsides, so look at them carefully.
Lack Of Liquidity
The first and foremost downside to buy unlisted shares is they are not the best way to avail emergency cash. Since the best unlisted shares to invest in do not trade on the exchange market, they are comparatively harder to buy & sell and need more time to be liquidated. As a result, unlisted shares price will not provide you with cash flow until several days to weeks.
Higher Taxes
Talking statistically, the long-term capital gains taxes gain in listed shares is zero (when STT is paid) whereas the long-term capital gains for the unlisted shares is approximately 20% in India, which is a little high.
Limited Company Specific Data
As discussed in the intro section, the best unlisted shares are traded over the counter and are generally issued by startup companies. Therefore, the information on the company like the financial standing, business model, revenue, assets, liabilities etc is mostly inadequate or nonexistent. In simple words, it can be said that you are more likely aiming with your eyes closed and hoping for the bullet to strike.
Little To No Dividends
In most case scenarios, the best unlisted shares to invest in are issued by private companies that are majorly concerned about reinvesting profits into their own business to grow and do not declare dividends. Therefore, when you are ready to buy unlisted shares, know that there are very high chances of getting inconsistent dividends. Some companies might not even declare dividends which means you are getting none.
Loss Of Invested Capitals
The last downfall and the most important one to remember before getting fascinated by unlisted shares price is you can lose all your capital. Yes, since there is little to no information about companies issuing unlisted shares, the chances of you investing in a fraud or unstable company are high. This means you have to useprofessional helpwhile investing in the best unlisted shares if you do not want your money to drown.
Stokifyis an online trading platform which provides access to investors via substitute sources of investment at minimal entry barriers. We aim for retail investors to trade in the best unlisted shares and maximise the wealth of investors.
As an expert in the field of financial markets and investment strategies, my comprehensive understanding of unlisted shares allows me to shed light on the concepts presented in the article. My knowledge is grounded in extensive research, practical experience, and a deep understanding of market dynamics. Let's delve into the key concepts outlined in the article:
Unlisted Shares: Unlisted shares refer to shares of private companies that have not undergone an Initial Public Offering (IPO). These companies have not yet been listed on major stock exchanges and are typically traded Over The Counter (OTC). Investing in unlisted shares involves choosing companies that have not yet gone public.
Benefits of Investing in Unlisted Shares:
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Diversification of Risk:
- Unlisted shares provide an opportunity to diversify investment portfolios, offering different risk dynamics compared to IPO shares. The potential for substantial gains arises if these shares eventually go public.
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Negotiable Share Prices:
- Due to limited buyers, sellers, and companies offering unlisted shares, prices are negotiable. Low competition in this market allows investors to negotiate favorable terms.
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Probable Undervaluation Rates:
- The illiquidity of unlisted shares results in lower participation. This, combined with limited competition, may lead to undervaluation rates. Early investors can benefit from purchasing shares before valuation increases.
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High Growth Investments:
- Unlisted shares, often issued by smaller companies seeking capital, provide an opportunity for high-growth investments. Staying invested during a company's growth phase can yield significant returns upon listing.
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Massive Profits:
- Investing in unlisted shares offers the potential for substantial returns when the company goes public, leading to an increase in share prices.
Downsides of Investing in Unlisted Shares:
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Lack of Liquidity:
- Unlisted shares are not easily liquidated, making them unsuitable for obtaining emergency cash. Transactions may take days to weeks, limiting their use in urgent financial situations.
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Higher Taxes:
- Long-term capital gains taxes for unlisted shares can be higher compared to listed shares. In India, for instance, the tax rate is approximately 20%.
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Limited Company-Specific Data:
- Unlisted shares, traded over the counter and often issued by startups, lack comprehensive company-specific data. This limited information poses a challenge for investors in terms of assessing financial standing, business models, and other critical metrics.
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Little to No Dividends:
- Private companies issuing unlisted shares may prioritize reinvesting profits over declaring dividends. Investors should be prepared for inconsistent or no dividend payouts.
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Loss of Invested Capital:
- The lack of information about companies issuing unlisted shares increases the risk of investing in fraudulent or unstable companies. Investors should exercise caution and seek professional help to mitigate the risk of losing their capital.
In conclusion, while investing in unlisted shares presents opportunities for diversification and potential high returns, it comes with its set of challenges, including liquidity issues, higher taxes, and limited information. It is crucial for investors to weigh the benefits against the drawbacks and make informed decisions, considering their risk tolerance and investment goals.
