The Types of Unlisted Shares

Unlisted share markets have grown in popularity in recent years. Investors with great knowledge, excellent financial health, and a long investing horizon purchase holdings in rising firms before their IPO and witness the true power of compounding. 

This has enticed many young investors to enter the pre-IPO market without sufficient understanding or supervision and to invest large sums in the unlisted. In this article, we will attempt to explain how an unlisted market operates and the various types of unlisted shares that you can avail of. Essentially, we will concentrate on the many elements of unlisted shares and their characteristics so that you can decide whether or not this market is for you. 

What Exactly Are Unlisted Shares? 

Unlisted firms are privately held companies that have not yet gone through the IPO process. Companies such as HDB Financial Services, Reliance Retail Unlimited, Paytm, Hero FinCorp, and others. Investing in unlisted companies allows you to have access to cutting-edge, creative enterprises. Moreover, as more renowned and popular companies like Ola and OYO are joining the unlisted shares market, investors are attracting more investors with their eye-popping prices, according to the Economic Times. 

Characteristics of Unlisted Shares

1. Untraded on Exchanges: Unlike their listed counterparts, shares of unlisted firms are not formally traded on any exchange. This category has its own market, where buyers and sellers transact via dealers.

2. Dematerialized: Unlisted equities, like listed stocks, are transferred to your Demat account. The status of unlisted shares purchased through a depository participant account, where they are available at face value, can be checked. 

3. Price Mechanism: Unlisted markets are a pure supply and demand game that puts an investor’s judgment to the test. As exchanges are not involved in this system, fair price discovery is constantly scrutinized. The price of a share is determined by a mutual agreement between the dealer and the customer. 

4. Growth factor: Unlisted markets allow investors to purchase interests in companies that are either technologically or operationally innovative. As a result, the cost is significantly lower than the listed space. 

5. Liquidity concerns: In unlisted marketplaces, liquidity concerns are common. Investors, on the other hand, seldom liquidate their stake in an unlisted market. 

Who Is Eligible To Invest In The Pre-IPO Market? 

Previously, only a few individuals could purchase pre-IPO stock holdings, but the field is now open to everybody. However, nothing is that simple for smaller investors with low resources because an investment, even today, goes through numerous phases of fundraising, and retail players can only participate when a specific threshold is reached. 

So, when a firm seeks investment in its early stages, it goes through seed capital funds, where worldwide funds support the company while endorsing its business model. There are several sorts of seed investment, such as series A, B, C, D, and so on. Seed investment investors include Ant Financial, Softbank, and Alibaba. 

Following this, angel investors and venture capital firms acquire a stake in the company, which is only focused on profit. Then there’s a private equity, which allows individual investors to engage. When compared to early-stage investors in seed investment rounds, they purchase holdings at a higher valuation. 

As a result, just because you are purchasing shares in an unlisted market does not indicate that your purchase cost will be particularly low. Though it is quite likely that you will find companies at very low values, conservative pricing is not a certainty. Following private equity, corporations often opt for primary markets, where the share is available to everybody. 

Types of Unlisted Shares

Common Stock 

A corporation’s common stock, also known as capital stock, is its normal ownership portion. In other terms, it is a method of dividing up a company’s ownership; one share of common stock indicates a percentage ownership share of a firm. For example, if a corporation has 100 outstanding shares, one share equates to one percent ownership of the company. 

Penny Stocks

Penny stocks are those that trade at a very low price, has very little market capitalization, are mostly illiquid, and are often listed on a smaller exchange. The pricing of penny stocks in the Indian stock market is typically low. These companies are extremely speculative and regarded as dangerous due to the lack of liquidity, a smaller number of owners, significant bid-ask spreads, and restricted information availability. 

Corporate Bonds 

A corporate bond is a sort of financial securities that a company issues and sells to investors. The firm receives the cash it requires, and the investor receives a predetermined number of interest payments at either a fixed or variable interest rate. When the bond “reaches maturity,” or expires, the payments stop, and the initial investment is refunded. 

The bond is often backed by the company’s capacity to repay, which is determined by its future revenue and profitability projections. Physical assets of the corporation may be used as collateral in specific instances. 

Government Securities 

In the investing sector, the term “government security” refers to a variety of financial products issued by a government. The most popular forms of government securities for most readers are those issued by the treasury in the form of Treasury bonds, bills, and notes. Many governments, however, will issue these financial instruments to support vital continuing activities. 

Government securities provide the guarantee that the money invested will be fully repaid when the asset matures. Some government securities may also pay out coupons or interest on a regular basis. Because they are backed by the government that issued them, these securities are considered conservative investments with minimal risk. 

Products Derivatives 

Derivative Product is defined as an over-the-counter financial contract whose value is designed to track or is derived from currencies, interest rates, securities, bonds, money market instruments, metals and other commodities, financial instruments, reference indices, or any other benchmark, and includes, but is not limited to, warrants, options, equity-linked notes, or other convertible securities. 

Conclusion 

Unlisted companies typically make headlines when the market is in a bull market. The shares of these unlisted firms are often purchased during a momentum by the majority of investors. 

However, if done correctly, the unlisted shares market can be extremely lucrative. It is usually preferable to make an educated selection with the assistance of investment consultants. So, if you’re looking for more information on how to buy unlisted shares in India effectively, read our guide today!