Investors can take advantage of unlisted shares over-the-counter (OTC), also called the unlisted market. Unlisted shares are considered hidden gems, and quality unlisted stocks can spin money within a short span. Market analysts find investing in unlisted equities hugely profitable as well as risky. For investors planning to capitalize on unlisted shares, here are the ways to jump into the unlisted market.
Understand Unlisted Shares
- Price Mechanism
Prices of securities in the unlisted market are a function of supply and demand Like we see in listed equity markets or any other underlying asset class. The dealer, buyer, and seller mutually agree to equilibrium price. As unlisted shares are not traded on public exchanges, exchanges are not involved in the price mechanism of these shares. The price discovery always happens with the agreement of parties involved.
- Growth Factor
If an investor wants to scan how a firm evolves, consider unlisted space. Unlisted markets allow investors to purchase shares in technologically or operationally novel companies with huge growth potential over time. However, investors should always compare the value of unlisted stocks to listed peer categories and try to find the best bargain. Sometimes the valuation of listed companies are cheaper than unlisted stocks.
- Dematerialised Securities
Like listed stocks, unlisted stocks are also stored in your Demat account in dematerialised/electronic form. You can check whether they are credited to your account with your respective depository participant – DP.
Unlisted shares are less liquid compared with listed stocks, however, the shares are liquid beyond the exchange timings.
Types of Unlisted Shares – Subsidiary of Listed company
- Parent Backed
These private companies are part of a powerful and well-established parent company listed on stock exchanges like Tata Technologies is a holding company of Tata Motors limited
- New Age Companies
These are the startups based on technologies like Zomato, Paytm, Ola, Paytm, Mobikwik, policy bazaar, etc., that have succeeded in their business models.
- Publicly limited companies – But not listed
These are not subsidiaries of a parent company but independent commercial entities. For example, kaiser corporation, Hicks Thermometers, etc.
Ways to invest in the unlisted market or private companies
- Purchasing from existing investors
There are some seed stage investors, existing management, or sometimes even promoters sell their shares for liquidity.
- Investing in New Businesses and Intermediaries
You can also invest in startups with the potential for multi-fold returns. These companies may be currently small and may not be on the investors radar, but they have the scope to be massively profitable in the future. These are the pre-IPO companies intended to get listed. Investors need to look for reliable intermediaries that can assist in concluding the deal while avoiding any counterparty risks. Unlisted shares can be bought through market makers specialized in sourcing unlisted shares and facilitating the trade.
- Purchasing Stocks from Promoters
One can invest in unlisted shares through the company’s promoters if they are willing to sell off or dilute their ownership in the company. Specialized market makers like Rurash Financials and intermediaries can help you connect with these promoters. Investment banks, wealth managers, and brokers can provide you with the route to connect with the company’s promoters. They can help you in the price discovery of shares and company valuation.
- Invest In PMS and AIF
Portfolio Management Systems (PMS) and Alternative Investment Funds (AIFs) are professionally managed investment portfolios. Such funds offer significant returns after the share listing on the stock exchanges when the share value increases. The portfolio manager modifies the portfolio’s composition according to the market developments to maximize the returns. One can invest in unlisted shares through PMS plans with the weightage in unlisted equities. Generally, these funds require huge investment amounts. Therefore, HNIs (high net worth investors) are the primary investors in the PMS and AIF.
Who should invest in unlisted shares?
The risks involved in the unlisted space are illiquidity, capital loss, dilution, dividends and loss of capital – very similar to the listed market investments. An investor with a long term perspective and high-risk profile can consider unlisted shares for a significant higher returns.
The unlisted stage is now open to everyone who has the capability of investment. Previously, only HNIs could invest in pre-IPO stocks. However, retail investors may participate up to a specific threshold as there are many rounds a firm goes through to raise funds in the unlisted space. An investment goes through many rounds of fundraising, for example, series A, B, C, D, and so on for seed investment. Following this, angel investors acquire a stake in the company. Then private equities invest in unlisted companies’ interests at a higher valuation.
Best Practices while investing in unlisted shares
- Registration with Registrar
It is the foremost step to verify whether the company you consider to invest in is registered with the Registrar of Companies. You can find the company’s name in the records of the Registrar of Companies on the official website. Find out how long the firm has been in operation. If a firm is offering you too large returns, do not fall for it and rethink before investing.
- Invest surplus funds only
Since investments in the unlisted space have low liquidity, one should invest only surplus funds that are not required shortly.
- Risk metrics – the risk taking capacity of the investor.
Loss of capital is one of the risks in the unlisted market. It is inevitable for investors to evaluate their risk profile before gaining exposure to unlisted shares. The risk of capital loss is also there in listed market investments
- Business Model Evaluation and growth prospects
Scrutinise the company’s growth potential and how its operations and growth prospects are aligned to increase the profitability of the business. There should be healthy competition in the relative industry.
- Management Analysis
Before investing in an unlisted company, research well about its management. Delve into the management’s performance and business decision-making aspects.
- Analysing annual report
Analyse the company’s fundamentals. Consider the profitability of the company. If the firm is consistently profitable, you can expect significant profits after its listing also.
- Direction from Investment Management Firms
Since the unlisted market is risky, an experienced investment management firm can help you to reduce the risk involved. The financial experts in their teams increase your knowledge of fair market pricing and help you to pick undervalued stocks.
Thus, early investors can benefit from the company’s shares even before the company’s stock goes on the public stock exchange for trading. The price volatility of unlisted securities is also lower than listed securities, which can complement your investment portfolio with diversification. Consider unlisted shares to generate significantly higher returns after due diligence.
RURASH is amongst the best Indian investment management firm, providing financial solutions to augment the client’s wealth and facilitate building a legacy.