Stock market investment is one of the common ways to earn wealth, but nowadays it is not easy with the numerous alternatives to investments. Unlisted shares and IPOs are new trending segments. Both describe the investment done in a company before getting listed on an exchange.
But you would be surprised to know that these instruments Unlisted shares and IPOs are two distinct entities in the stock market.Where unlisted shares give the opportunity to invest in the company’s stage; on the other hand, IPOs provide the opportunity to invest in their Initial Public offering stage. In this blog, we’ll explore how unlisted shares and IPOs are actually diametrically opposite and discuss the pros and cons of investing in each.
What are Unlisted Shares?
Unlisted shares are the stock of companies that are not available for trading on any stock exchange. These shares are typically held by a limited number of investors, such as company founders, private investors, or venture capital firms. Unlisted shares are often found in private companies or startups that have not yet gone public through an IPO (initial public offering). These shares are traded only over OTC or over-the-counter platforms and directly between buyers and sellers.
Benefits of Investing in Unlisted Shares
Discounted Valuations: Unlisted shares are often cheaper than their potential IPO price. Investors can make money by buying these shares at a discounted price before the company decides to go public.
High Return Potential: The possibility of higher gain on investment is what draws some investors to unlisted shares. Early investors may experience a High Return if the company does successfully and later offers its shares at a higher price.
Long-Term Gains: Unlisted shares can provide substantial long-term growth if the company successfully grows and eventually goes public. Many investors prefer this option for companies that are not yet ready for an IPO but have high growth prospects.
Drawbacks of Purchasing Unlisted Shares
Lack of Liquidity: The liquidity level is one of the main drawbacks of unlisted shares. It may be challenging to find a buyer or seller for unlisted shares because they are not traded on an exchange such as NSE or BSE.
Limited Information:Unlisted companies do not follow the same standards of regulatory standards and public disclosure as listed companies. As a result, investors frequently lack access to corporate reports, financial data, and other crucial information.
Higher Risk: There is a high level of risk associated with investing in unlisted shares. Since many of these companies are still in their early stages, there is no assurance that they will be successful or go public in the future.
What is an initial public offering (IPO)?
An IPO is the first time a company makes its shares available to the general public. This enables the company to raise money to finance different initiatives, grow, or settle debt and expand. A company’s shares are listed on a stock exchange when it goes public, allowing both institutional and individual investors to trade them.
Benefits of Investing in IPOs
Transparency and Regulation: Government regulators such as the Securities and Exchange Board of India (SEBI) monitor initial public offerings (IPOs). This gives investors peace of mind by guaranteeing openness in the business’s operations, management, and finances.
Growth Potential: An IPO is one of the best ways to invest early in a business with significant growth potential through an initial public offering (IPO). Early-stage investors could profit from a large increase in the stock price if the company is successful after going public.
Liquidity: Liquidity is provided from the beginning, with which you can purchase or sell shares on the stock market after they are listed on a stock exchange. Compared to unlisted shares, this gives you more flexibility because you can withdraw your investment at any moment.
Drawbacks of Investing in IPOs
Volatility: In the initial days or months after listing, IPO equities often see high price fluctuations. For investors, particularly those seeking rapid returns, this may pose short-term dangers.
Poor performance: Some initial public offerings don’t go well. Many businesses might not live up to the initial excitement, and after the initial spike, their stock values may fall. Before investing, it’s important to do well research on the business.
Risk of Overvaluation: Some companies may set their IPO price too high, which can result in overvaluation. Long-term underperformance of the stock may result from this as the market comes to recognize the company’s actual worth.
IPO vs. Unlisted Shares: Which Should You Choose?
So far, we hope. You know what unlisted shares and initial public offerings (IPOs) are. What are they, and what are the advantages or disadvantages of making an investment? Now, whether you’re a novice or an experienced investor, you may be wondering which category to pick. Let’s talk about it.
Risk Tolerance
IPOs: Because of the Sebi regulations, the initial public offerings (IPOs) are typically less unstable than unlisted shares; yet, they are still dependent on market volatility and swings during the early time.
Unlisted Shares: Due to lack of regulation, this segment holds instability compared to IPOs. However, if the business is successful in going public, it also has the possibility of high returns.
Company Stage
IPOs: Companies that use initial public offerings (IPOs) are often more well-established and have a track record of success. They are usually not early-stage startups, though they may still have space to grow.
Unlisted Shares: Companies with unlisted shares often have less exposure and recognition in the market compared to publicly listed companies. This can make it harder to attract new investors or partners.
An unlisted company is currently unlisted from stock exchanges but has pipelined to invest in the future. You can directly invest in that company by being in touch with their board of directors or CEO.
Buying ESOPs or Employee stock Ownership plans Directly from Employees
ESOPs, or employee stock ownership plans, are the perfect way to invest in unlisted shares. You can purchase specific unlisted shares from company employees at market price.
Buying stocks directly from promoters or founders
You can purchase a significant stake in an unlisted company from the promotor or founders themselves. For the same, you can contact a trusted investment banker, wealth manager, or broker.
Conclusion
Your investing objectives, risk tolerance, and time horizon will all influence your decision between IPOs and unlisted shares. IPOs may be the best option for you if you want liquidity, transparency, and comparatively lower risk. On the other hand, if you are willing to take on more risk for the potential of higher returns and are comfortable with holding investments for the long term, unlisted shares could be an attractive option.