Introduction📝
This blog will help you understand unlisted shares – these are pieces of ownership in companies that aren't bought and sold on the regular big stock markets. We'll explain what they are, why some companies choose not to be on those markets, types and look at the good things and the not-so-good things about investing in these different kinds of shares.
1. What are stocks, shares & equity?
Before starting the topic, let’s first understand shares, stocks and equity.
Imagine a pizza 🍕
Stock: The whole pizza represents the stock. If the pizza has 8 slices, each slice is a share, and all 8 slices together make up the stock. This refers to all the outstanding shares of a particular company.
If there are many varieties of pizza, they are called stocks. The term "stocks" represents multiple classes — in our example, the different varieties of pizza.
Share: It's like one slice of that pizza. If the pizza has 8 slices (stock), and you own 2, you have 2 shares. When you buy a share, you own a small piece of the company.
Equity: This is the value of your slices after we subtract the cost of making the pizza (the company's debts).
Yes, you read it right — shares, stock, and equity are different terms, but they are often used interchangeably in general conversation.
2. Shares beyond the public exchanges: What are unlisted shares?
Unlisted shares, as the name suggests, are the shares of the companies that are not listed and traded on stock exchanges like NYSE, NASDAQ, NSE, BSE, SSE; also known as off-market shares/stock.
Now a question comes to mind — why are they not listed? Let's try to understand!
🎁Check This Special Offer(AD)3. Reasons behind unlisted status: Why aren't these shares listed?
Let’s understand some reasons behind their unlisted status:
Not big enough yet: Sometimes, a company is still small and doesn't meet the rules to be on the stock market. It's like a small shop that's not ready to open in a huge mall.
Doesn't want too many rules: Being on the stock market means following many rules and sharing a lot of information. Some companies don't want this extra work and prefer to keep things more private.
Wants to Stay in control: When a company is on the stock market, lots of people can buy shares and have a say in decisions. Some owners want to keep control and avoid too many outsiders being involved.
Not ready to share everything: Publicly listed companies have to share their financial details with everyone. Some private companies don't want to show their numbers to the public or their competitors.
Got kicked off: Sometimes, a company's shares were listed on a stock market before, but they didn't follow the rules or broke the rules. The stock exchange or regulatory body can then "kick them off," which is called delisting.
Finally, we have understood the possible reasons behind a company's unlisted status.
So now, let's understand the pros and cons of unlisted shares!
4. Exploring the advantages and disadvantages of unlisted shares
So, we know what unlisted shares are. But why do people find them interesting, and what risks come with them? Let’s look at some pros and cons of unlisted shares:
a) Unlisted shares advantages: Potential benefits for investors
🟢 Possibility of better returns: Early entry, higher potential rewards.
🟢 Low volatility: Are not affected by daily ups and downs of the stock market.
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Early access: You can invest in a company before it goes public.
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Customized investment deals: In some cases, investors can negotiate
better terms (like price or quantity) directly with the company or seller.
🟢 Access to unique companies: You get a chance to invest in startups, private companies, pre-IPO shares that aren't available on the regular stock market.
b) Unlisted shares disadvantages: Key risks and limitations
🛑 Higher investment amount: Minimum lot size required to purchase is higher.
🛑
Low liquidity: It’s hard to sell them quickly because there are fewer
buyers.
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No regular trading platform: You can't trade such shares on stock
exchanges.
🛑
High risk: Companies often have a shorter track record, less public information, and their future success is less certain.
🛑
Longer transaction times: Buying or selling unlisted shares usually takes
more time and effort compared to listed stocks.
5. Types of unlisted shares: A comprehensive overview
There are various types of unlisted shares, and different terms are used depending on the phase or situation. For example, when unlisted shares are given to employees as part of their compensation or as a reward, they fall under the ESOP (Employee Stock Ownership Plan) category.
Let's understand some types of unlisted shares:
(a) Pre-IPO shares: Companies that are planning for an IPO —the shares of those companies are called pre-IPO shares.
(b) Employee stock ownership plans (ESOPs): when shares are given to employees of a company as part of their compensation or as a reward are called ESOP.
(c) De-listed shares: Shares of companies that were once listed on a stock exchange but have been removed are called delisted shares. De-listing can occur for various reasons, such as non-compliance with listing requirements, mergers, acquisitions, or the company choosing to go private."
(d) Privately held shares: These are shares of companies that do not plan to list their shares on a public stock exchange.; shares are owned by promoters (founders), private investors, or private equity firms.
(e) Startup equity: Shares of companies that are in early stage of operations are called startup equity; these shares are highly illiquid and their valuation can be challenging.
Conclusion
Unlisted shares are like owning a piece of a company that's not on the regular stock market. They can make good money but are also riskier and harder to sell. Whether it's getting in before a company goes public or owning a bit of a startup, knowing the different kinds of unlisted shares is important if you're thinking about investing in them.
📢 Stay tuned for Part 2, where we will cover more important points related to unlisted shares. Since Part 1 was already quite detailed, we have saved the rest for the next part.
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👁🗨 Must read: Fundamental vs Technical analysis
🎯 Quiz: Check Your Understanding
📢 Ready to test what you’ve learned? Take our quick quiz designed to check your understanding of unlisted shares after reading Part 1! Let’s see how much you remember! ✅
📌Disclaimer: The information provided in this blog is for educational purposes only and should not be considered as financial or investment advice. Please do your own research or consult a financial advisor before making any investment decisions.
