The buzz in the primary market is getting bigger. Series of high-profile IPOs from companies like the National Stock Exchange (NSE), Swiggy, and Hyundai are generating substantial interest
Often the question is how do you assess these businesses of unlisted companies? In response, Financial Express.com brings about a comprehensive guide to help decode trading in the unlisted market, factors that influence valuations and the risks and rewards of investing in this space.
How are companies traded in the unlisted market?
The unlisted market involves the trading of shares of companies that are not yet public. Most of these companies are privately held, with shares owned primarily by founders, venture capitalists, and private equity firms.
Some of the biggest names currently traded in the unlisted market include NSE, Swiggy, Tata Capital, Oyo Hotels, Waaree Energies, HDB Financial Services, Chennai Super Kings, and Urban Company, among others.
What Are The Risks and Rewards Factors in Unlisted Shares?
Investing in unlisted shares comes with its own set of challenges. Liquidity is perhaps the biggest concern for investors. Unlike listed stocks, which can be bought and sold with relative ease, offloading unlisted shares can take weeks or even months, depending on the demand and market conditions.
However, the rewards can be substantial for those willing to take the risk. Early investors in unlisted companies that eventually go public or are acquired by larger firms may see significant returns on their investments.
Regulatory Challenges in the Unlisted Market
Another critical issue in the unlisted space is the regulatory environment. Listed companies must adhere to strict rules, such as regular financial disclosures, but unlisted firms are subject to far fewer transparency requirements.
This lack of regulation increases the risk for investors, particularly those who rely on accurate and timely information to make informed investment decisions.
While investing in unlisted shares can be rewarding, it requires a deep understanding of the risks and careful consideration of the regulatory challenges. For investors looking to capitalise on the next big IPO, understanding the dynamics of the unlisted market is key.
What Drives Valuations in the Unlisted Space?
Valuing unlisted companies is more challenging than valuing their listed counterparts due to information asymmetry. Since unlisted firms are not required to publicly disclose their financial statements, investors face difficulty in accurately determining their worth.
Other factors driving valuation include the company’s size, growth potential, and risk profile. Smaller firms with limited financial histories are often considered higher-risk investments, which can reduce their valuation.
However, companies showing significant growth potential, particularly Indian startups backed by venture capital, may see their valuation rise despite associated risks.
Avenues to Buy Shares in the Unlisted Market
Unlike listed shares, which are easily accessible to anyone with a Demat account, buying unlisted shares is a more complex process. Transactions often occur through intermediaries or over-the-counter (OTC) markets. These channels, while legitimate, are not as widely understood or regulated, making it difficult for the average investor to participate.
(Disclaimer: Views, recommendations, and opinions expressed are personal and do not reflect the official position or policy of Financial Express.com. Readers are advised to consult qualified financial advisors before making any investment decisions. Reproducing this content without permission is prohibited.)
