Shares

Should investors blindly follow the trend and invest in unlisted shares? Factors investors should consider?

In contrast to investing later, investing in a start-up at an early stage will benefit the investor more because it will result in greater profits and ownership holdings. Early investment in a start-up not only promises higher returns but also makes sure the investor provides guidance and decisions to the business. Every stage that a startup goes through presents different opportunities and risks for investors.

Unlisted Shares are those shares that are not yet listed on the stock market. With emerging start-ups and new-age companies, investment in Pre-IPO companies has become attractive amongst investors. For example – Boat, OYO, and Jio are some popular Unlisted Stocks.

Investment in unlisted stocks comes with its own share of risks and rewards. Every investor must know the risks and returns associated with every type of investment before choosing to invest. This will help them plan their finances better and set realistic investment goals.

The risk associated with investment in Unlisted Shares

Every investor should carefully assess the risks before investing in Unlisted shares –

– Risk of liquidity

Investors do pre-IPO investing in unlisted shares with the hope of making huge profits once they get listed on the stock exchange. It is not easy for investors to convert unlisted shares into cash. This means investors may be unable to exit from their investment in an emergency without losing their capital.

If the company listing is delayed, the investor gets stuck with the unlisted pre-IPO shares for an even longer duration. Therefore, there is no guarantee of quickly liquidating the investment in unlisted shares before the listing of IPO.

– Risk of valuation

It is quite challenging to determine the fair value of a company’s unlisted shares since limited financial information about the company is known to the investor. Usually, a company’s valuation is based on growth plans, forecasted earnings and statements, etc., which could be absent or not readily available to an investor. A lot of negotiation could be involved to get the rightunlisted share price.

– Risk of less transparency

Promoters or large institution buyers take key decisions of unlisted companies. Even if investors have a significant number of shares in an unlisted company, the company is not obligated to share its business plans or financial reports with them. Due diligence is generally the investor’s responsibility

– Risk of dilution

In the growing phase, many companies issue shares to generate capital. The investing process to buy/sell unlisted pre-IPO shares is not simple and involves a lot of paperwork. There is also a risk of the company raising funds at a lower valuation which could reduce the value of the unlisted shares held by the investor.

Factors to consider before investing in Unlisted Shares

Analyze the company’s business

1. Find out what the management aims for the company’s future

2. Check out the company’s revenue sources and revenue mix and risk to business cashflows

Find out what is the company’s value proposition

1. Assess the company’s competitive edge among industry peers

2. Find out what is the USP of the company’s products and offerings

Look at the company’s valuation

1. Check out the trading price of the company’s unlisted shares in the grey market

2. See if the relative valuation is higher or lower than its peers

Look at the future potential of the company

1. See how the company plans to expand and fund its expansion

2. Analyze future prospects and growth plans of the company and execution strategy

Advantages of investing in Unlisted Shares

Businesses that are in the pre-IPO stage frequently have a proven revenue model and may raise additional capital from the market by going public. Investing in a company that is about to launch its IPO (initial public offering) may allow an investor to participate in a company’s growth; however, as such bets include risk, they should only be made by aggressive investors.

Unlisted company stock values in the grey market are frequently less volatile than those in the main market. Furthermore, purchasing stocks on the grey market is no longer a luxury reserved for large institutions/investors. Individual investors now have access to the grey market.

While there are several reasons why a person would invest in unlisted shares, the following are some of the more popular benefits of doing so:

1. High-return potential investments: Shares are frequently overpriced or undervalued for lengthy periods of time as they are not very liquid. As a result, an investor may make a sizable return if they can purchase shares when they are cheap.

2. Risk diversification: Unlisted equity shares are a distinct asset class, so for investors who are heavily invested in listed stock markets and mutual funds, unlisted shares as an asset class offer some risk diversification.

3. High growth potential companies’ investments: Unlisted companies are often smaller in size and have yet to reach a scale where they may go public in order to get funding for their capital needs. As a consequence of the small base effect, investing while the firm is smaller in size and investing during its growth phase before it gets listed on public markets generally generates large returns.

4. Less Volatile Price Range: Unlike listed equity shares, the values of unlisted equity shares are typically less volatile, so the investor does not need to be concerned about price changes on a daily basis.

Conclusion 

The buying and selling of stocks is a common way for people to increase their income. Unpopular as it may be, buying pre-IPO shares from firms may actually help you make a lot of money. A substantial profit could be made by purchasing shares in a company while it is still in its early stages of development. Additionally, buying unlisted shares through a Platform that is engaged in buying and selling unlisted stocks online can be of great help as they guide and assist in buying and liquidating your Pre-IPO investment.

(Author: Manish Khanna, Co-Founder, of Unlisted Assets, a tech-enabled platform for retail and institutional users to buy/sell unlisted shares.)

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