Investors in India have traditionally focused on stocks listed on the NSE and BSE. However, another investment category has gained attention in recent years: unlisted shares.
But what are unlisted shares, how are they different from listed stocks, and how can investors buy unlisted shares?
If you are new to this segment, this guide explains the basics of unlisted shares, pre IPO shares, their potential benefits and the risks investors should understand before investing.
What Are Unlisted Shares?
Unlisted shares are equity shares of companies that are not listed on a recognised stock exchange.
Unlike listed companies, whose shares can generally be bought and sold through stock exchanges such as the NSE or BSE, unlisted companies do not have the same continuous exchange-based trading mechanism.
An unlisted company can be a private business, a company preparing for an IPO, a subsidiary, or an established business that has not yet pursued a public listing.
Because these shares are not traded on a stock exchange, buying and selling them generally happens through off-market transactions facilitated by intermediaries.
What Are Pre-IPO Shares?
Pre-IPO shares are shares purchased before a company completes its Initial Public Offering (IPO).
The idea behind pre-IPO investing is relatively simple: an investor gets exposure to a company before its shares potentially become available to the wider public through a stock exchange.
For example, if a company is preparing for an IPO, investors may look at its unlisted shares as a way to gain exposure before the listing.
However, investors should remember that an expected IPO does not guarantee a particular listing date, issue price or listing price.
Why Do Investors Buy Unlisted Shares?
There are several reasons investors explore this asset class.
Early Access to Businesses
Pre IPO investing can give investors exposure to companies before they become publicly traded.
Portfolio Diversification
Some investors consider unlisted securities as an additional component of a diversified portfolio alongside listed equities, mutual funds, bonds and other investments.
Established Businesses
Not all unlisted companies are early-stage startups. Some are mature businesses with significant operations, customers and revenues.
Unlisted Shares vs Listed Shares
The biggest difference is liquidity and price discovery.
A listed stock generally has a visible market price determined by buyers and sellers on an exchange.
Unlisted shares do not have this same continuous exchange-based price discovery.
This means an investor may have to wait longer to find a buyer when they want to exit.
The quoted price of an unlisted share can also vary depending on demand, supply, transaction size, company developments and other factors.
How Can You Buy Unlisted Shares?
Investors generally purchase unlisted shares through intermediaries that facilitate off-market transactions.
Before you buy, research:
- The company’s financial performance
- Revenue and profitability
- Debt and cash flows
- Shareholding structure
- Current valuation
- Recent transaction prices
- Potential IPO plans
- Liquidity and exit options
Do not make an investment decision simply because a company is well known or because an IPO is rumoured to be approaching.
Are Unlisted Shares Suitable for Everyone?
Unlisted shares may be more suitable for investors who understand the risks and can potentially hold their investment for an extended period.
They may not be appropriate for someone who requires immediate liquidity or is uncomfortable with uncertain valuations.
The most important principle is to understand what you are buying and why you are buying it.
Final Thoughts
Unlisted shares and pre-IPO shares can provide investors with exposure to businesses before they become publicly traded. At the same time, they involve risks that are different from those associated with liquid listed stocks.
If you are considering buying unlisted shares, focus on the underlying business, valuation, liquidity and potential exit options rather than simply following market hype.
Disclaimer
This article is for educational purposes only and is not investment advice or a recommendation to buy or sell any security. Unlisted shares involve liquidity, valuation, business and regulatory risks. Investors should conduct independent due diligence before investing.
