Unlisted Stock Market – How does Unlisted Share Market work?

Check everything you need to know about how does unlisted stock market work, in this article.

The Unlisted Stock Market or Pre IPO Market is a market of hidden gems – stocks that are yet to be listed. However, you need to have an eye for such gems.

To invest in this market, you need to be aware of the market components.

Components of Unlisted Stock Market?

If we categorize the market components of unlisted shares, then there are three of them.

• Investors
• Intermediaries
• Depositories

Investors of Unlisted Stock Market

Investors include both buyers and sellers in the unlisted stock market.

These investors who have the risk appetite and want to explore the companies’ stocks that are yet to go public invest in this market. Investors buy or sell the stocks with the help of intermediaries.

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Intermediaries in Unlisted Stock Market

Intermediaries are the individuals or the firms who help the investors and the unlisted companies to trade the unlisted stocks.

There are five types of intermediaries in this unlisted stock market which are –

Brokers in Unlisted Share Market

They are the most common medium of buying unlisted stocks from unlisted companies. Furthermore, they have different unlisted stocks with them from different unlisted companies.

They sell those shares to the interested investors. If an investor already has unlisted stocks, and want to sell the same, these brokers buy the stocks as well.

They have a minimum investment criterion for the investors which varies from one broker to another.

Also, they do not promise the companies to sell all their unlisted shares, neither have they promised anything to the investors.

They just act like the mediator who buys from one party and sells to the other. There are counterparty risks associated with these brokers.

Promoters of Private Placement

When a company wants to go public, they hire the promoters or the underwriters who are generally investment banks and merchant banks.

They buy the unlisted shares from the company and offer the same to the investors who invest in these shares. This is known as private placement as well as the shares are bought and sold privately.

However, the minimum investment requirement in unlisted stocks via these promoters is higher than other intermediaries.

Crowdfunding Platforms

Often unlisted companies secure funds and raise them by crowdfunding. This is a process of inviting people to invest in the company and the amount of investments is quite minimal.

The company is returning to offer its shares/ equities to the investors. Though this is quite similar to IPO this is not an IPO.

Both common and preferred shares are disbursed by the company against the investments made by the people.

Employees of the company

Some of the companies have an ESOP scheme. Under this scheme, the company offers shares to the employees as a bonus, part of the remuneration, and others.

The employees thus get shares of the company and they can sell those shares in the unlisted stock market.

Portfolio management services

Some of the PMS firms offers unlisted stocks to their clients. The process is similar to that of the brokers.

They buy the shares from the company or other sources mentioned above and then include the same in the portfolio of the investors who are willing to take the risk and want to earn massive returns.

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Depositories in Unlisted Stock Market

When you are buying unlisted stocks, a Demat account is mandatory. SEBI has mandated that all unlisted shares need to be in dematerialized format.

So, there are depositories – CDSL and NSDL in India which offer dematerialization services and provide the Demat account to the investors.

How does Unlisted Stock Market work?

So, now you know the three components of the unlisted stock market. Now let us see how these three components work together to facilitate the investment activity in unlisted shares.

• Investors place an order with any of the intermediaries and quote a price for the shares.
• Both the parties need to agree on the same price.
• Once they agree, the investor needs to send the investment amount to the bank account of the intermediary.
• Once the intermediary receives the amount in his or her bank account, they deposit the shares in the Demat account of the investors.
• Then the depositories process the transaction and finally, you can see the shares in your Demat account within t+3 days.

Note – Here ‘t’ stands for transaction day.

Unlisted Stock Market – Conclusion

The process of investing in unlisted stocks may seem difficult at the beginning but once you dig a little deeper, you can understand, it is quite easy.

All you need to do is to find the right intermediary and choose the right stocks.

FAQs – Unlisted Stock Market

Here are the FAQ on Unlisted Share Market –

What is an intermediary?

Intermediary means the people who initiate the investment process between the company selling the shares and the investors buying the same.

What is a depository?

Depository is an organization that offers dematerialization services and Demat facilities. The stocks you purchase which lie in your Demat account are maintained by these depositories.

What is crowdfunding?

Crowdfunding is the process of finding a company by acquiring investments from the public in general but the investments are really small in amount.

What is private placement?

Private placement means selling stocks to investors in a close market or pre-selected investors. This is the opposite of IPO where stocks are offered in the open market to the general public.

What is counter-party risk?

Counter-party risk is the risk associated with default from any of the parties. For instance, you bought the unlisted shares from a broker, transferred the money into his or her account, and then he or she vanishes away without transferring the shares. Your entire money will be lost. This is known as counter-party risk.

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