We are all aware of the benefits of investing in equity - it provides an unprecedented upside if done right. Many of us do not realise that investing in unlisted shares, there are many advantages of investing in unlisted shares:
1. Diversification of risk:
Unlisted shares offer different risk dynamics and can be complementary to someone who is invested in listed shares. They can be a good means to diversify the portfolio. Unlisted shares offer similar to better return potential as compared to that of listed shares. These stocks may go public at some point in the future and that can offer substantial upside when they list on the stock exchanges. However, whether one invests in listed or unlisted shares, it is important to evaluate the valuation metrics alongside the price and invest in undervalued stocks with a significant earnings growth potential.
2. Low liquidity leading to undervaluation:
Most unlisted shares are illiquid, they can attract only a certain community who are willing to stay invested for a longer horizon. Given the lower demand for these investments and the lower number of participants who want to be a part of this community, the valuations are generally lower. There are many opportunities to invest in an undervalued stock. However, it requires some acumen and knowledge to identify such opportunities. For a beginner, it may be better to avail the service of an expert who can provide the required guidance.
3. Lower volatility:
Due to the illiquid nature of the shares, there are considerably lower volatility concerns. The standard deviation which is technical term of volatility is much lower than listed shares. However, the quantum of downside can be substantially high if the wrong investment is made. The price would not fluctuate daily, the demand and supply for these stocks are not tracked daily. This relative stability of prices will ensure that there is reduced financial stress with regard to this investment as compared to listed shares.
Additional Read - Unlisted Equity Shares – All you need to know about it
How Much to Invest?
One must gain exposure towards unlisted shares only to the extent that complements the existing portfolio. Going overboard can increase the risk substantially. It is pertinent to evaluate the risk potential of oneself and ascertain the risk of the investment and accordingly choose one that is conducive to one's risk profile. The magnitude of downside in unlisted stocks is substantially high, hence it is important to avail only as much which aligns well with one's risk appetite.
What is the size of investment?
Listed shares can be bought as a single unit with minimal funds; however, in the case of unlisted shares the investment size is large, and these unlisted companies do not intend to have too many stakeholders. They also may not choose to dilute investors who may bring value to the company, since as equity owners, they become partial owners of the business.
Additional Read - Wealth managers can’t predict pandemics – but here’s what they can do
How to invest in unlisted shares?
1. Directly with the company:
The company can be approached directly, in case it becomes to the notice of the investor that the company is actively looking at raising funds. The investor has to do preliminary work by conducting a thorough valuation and evaluating the management’s intent about raising capital.
2. Employees or representatives of the organisation:
Many companies offer unlisted shares to their existing employees, by offering them ESOPs as part of their pay package. This enables their employees to avail themselves of ownership in the organisation. Their level of commitment and productivity tends to increase substantially due to their sense of ownership. However, this can be a source for an investor to own a piece of the company that is not listed in the market yet.
3. Broker / Wealth Management Firms:
While you would have heard of stock broking firms dealing in listed equity, you would not have heard a lot of broking firms dealing in unlisted equity. However, with the advent of start-ups emerging in the country, we are now seeing a steady increase in brokers that deal in unlisted equity. Besides there are many of the wealth management outfits which offer portfolio management services or alternative investment funds, also offer unlisted shares as part of their investment avenues.
Keeping in mind the high level of risk involved in an unlisted equity, professional guidance is desirable. This is where experts at Tata Capital Wealth comes into play, where they help to evaluate the set of unlisted shares that is offered and showcase the opportunities available in the unlisted space.
10 January 2022
4 mins read
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