Investing Guidelines for Unlisted Shares – Benefits & Risk of Investment
Know about Investing Guidelines for Unlisted Shares here. This article also states both the upsides and the downsides of the investment, i.e. Benefits and Risk of unlisted shares.
Moreover, there are few tips for making wise investment decisions regarding unlisted stocks.
Any kind of investment has pros and cons to it. Whether you invest in listed stocks, bonds, mutual funds, or unlisted stocks, there are both benefits and risks.
Often unlisted stocks are neglected because of the high-risk profile. Yes, the risks are there without a doubt but there are several benefits of exploring this market as well.
If you are interested in unlisted stocks, here is a complete article for you.
Guidelines for investing in Unlisted Shares
Here are some of the important guidelines that an Investor must follow –
- You need to confirm whether the company you are investing in, is registered with the Register of Company or not. You can do that by enquiring in the office of Registrar of Company.
- The company needs to be reputed as well. There are thousands of such registered companies. However, a handful of them are popular.
- If someone is offering you way too higher a return, then think and look into it wisely. Do not fall for it as, often if it seems to be too good to be true, it is not worth it.
- Look into the fundamentals of the company. Make sure the company is constantly making a profit or at least not running in loss. Check for how many years the company is in the business.
- Check for its management before you invest in the unlisted shares of it. You need to dig deeper and find out the performance of the management, corporate decision-making, and other factors as well.
- If the company has already issued a prospectus, get it and read it before you invest.
- Try to find out the plans of the company and how they can affect the company’s growth.
These are the important investing guidelines for unlisted shares in India.
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Benefits of Investing Unlisted Stocks
The unlisted stock has its own set of advantages and there are many of them. Unlisted stocks benefits are as follows –
Unlisted stock market is illiquid, but this downside actually can be turned into an upside for investors in unlisted stocks.
Due to the illiquidity, the stock price either remains undervalued or overvalued for a long duration. You must try to invest when it is undervalued.
Then, in the long-term you can make huge profits, especially, if the stock gets listed afterward and the company forecasts great returns.
Unlisted stocks are not for short-term investment and not at all meant for trading. So, there is no hurry in buying and selling them to earn some penny out of it.
You can just do your research, search for the best unlisted stock, and then invest, and wait. There is no need to bite your fingers every day when the market opens or closes.
You can just wait for the right time, when the stock price is at your desired level, you can sell it off and credit your bank account with a lump sum amount.
As investors, we all know the benefit of diversifying our investment portfolio. The more you diversify, the less risk your investment portfolio would have, right?
Unlisted stocks are not volatile or slightly volatile. So, if you have highly volatile stocks in your portfolio, you can mitigate the risks of the same, by adding some good unlisted stocks in your portfolio.
Not only this would bring down the risk but also increase the chances of higher profit margins.
Close Market Investment
The unlisted stocks are traded over the counter – OTC. So, you are in direct contact with the broker from whom you are buying or selling the shares.
This in turn helps in building faith for future investments. The intermediary can intimate you whenever there is a good opportunity for investing in unlisted shares or other instruments as well.
Negotiation is Possible
In the stock exchange, there are innumerable number of buyers and sellers. But in the OTC platform, there are hardly a few.
So, if you think a stock will be of a certain price and you want to buy or sell it at a certain price, then you have the power to negotiate it directly with the intermediary.
This increases the chances of higher profits.
Risks of Investing in Unlisted Stocks
So, now you know the upsides of investing in unlisted securities, let us see the downsides as well.
No regulatory framework
People who invest in unlisted stocks do not enjoy the safety and protection provided by SEBI or the stock exchange. There is always a huge counterparty risk.
For instance, you have to transfer the amount to the intermediaries’ account after placing the purchase order. Then within T+3 days, the shares are transferred.
The intermediary can choose not to transfer the shares, and you can simply lose your money.
Moreover, the unlisted companies do not have to follow stringent guidelines of the Registrar or other similar organizations for selling their shares.
The prices can be highly manipulated by the intermediaries as well without any kind of regulatory body.
No formal market for trading
These shares are traded over the counter which is not an official stock exchange. There is no existence of OTC physically. It is just between the two parties involved in the trade.
Unlisted shares are highly illiquid. They are not on the stock exchange where multiple buyers and sellers are trading them.
If you need to buy or sell you need to have a specific contact point that is the intermediary. If the intermediary does not want to purchase, then you have to again look for others.
So, these shares cannot be traded seamlessly or easily. It is a lot of effort and time taking process.
There is always uncertainty around the company as it can wind up anytime. There is also uncertainty regarding the price of the unlisted shares.
This is because the price of these shares is completely based on assumptions.
So, now as you know the risks involved in this investment, let us see some of the guidelines which you can follow to mitigate these risks to a great extent.
Investing Guidelines for Unlisted Shares – Conclusion
It is risky to invest in unlisted shares, no doubt about that but the perks are huge.
So, if you wisely do your research about the company, make sure the fundamentals are strong enough to pull the company towards success, then you can make your move and invest in the unlisted shares.
Benefits and Risks of Unlisted Shares – FAQs
Here are the FAQs on Benefits & Risks of Investment in Unlisted Stocks –
Ques – What is diversification?
Answer: Diversification means keeping different types of investments in your portfolio with different risk and return profiles.
There must be no or less co-relation between these investment vehicles. For instance, when the stock market goes down, the gold price goes up. This is because both are not co-related.
Ques – Shall I invest in unlisted shares just because it looks very promising?
Answer: If an unlisted share looks very promising, you can do your research and check whether it has strong fundamentals or not and then only invest in it.
Ques – Do I just believe in an intermediary and invest in the unlisted stock?
Answer: Never, ever do that. Whenever you are investing in unlisted stock, first choose a stock after doing a thorough research and then only negotiate with the intermediary and then invest.
Ques – What are company fundamentals?
Answer: Company fundamentals include a balance sheet, profit, and loss statement, trading account statement, cash flow statement, management decisions, corporate measures, and many other aspects.
Ques – What is Registrar of Company?
Answer: Registrar of Company is the official body that registers each of the companies in India as per Companies Act, 1956.
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