Formal stock exchanges are the main platforms for trading of shares and other securities. Companies have to comply with certain conditions for being able to be registered on a stock exchange. Some smaller firms and enterprises who are not able to fulfil such requirements can’t list their shares there. This doesn’t mean that you can’t buy and sell these stocks. There is a separate system intended for unlisted shares buying and selling.
What is unlisted stock market?
Unlisted stock market is an over-the-counter market type that deals with trading of unlisted stocks. These stocks are hence, also called over-the-counter stocks. It is a platform for companies which are not able to surpass certain annual income or market capitalisation threshold. Companies who have not issued certain number of shares also uses this feature. You may trade in unlisted stocks as well as unlisted corporate bonds, government securities and derivative products.
The most common type of stocks are listed on Over The Counter Bulletin Board (OTCBB) that are also called pink sheets. Such stocks may be penny shares that have an extremely low price and they also include some foreign company’s stocks too that don’t want to report file with the SEC.
How you can invest in unlisted securities?
Start-ups have an ambition for achieving good growth in the coming months. Unlisted shares can give you an opportunity to earn huge profits once such shares get listed. If you are wondering how you can trade in unlisted securities, you must see the options below. The transfer of such stocks is done online and hence, you must have a demat account to acquire them. These are the ways to invest in unlisted shares:-
- Most new companies are giving an Employee Stock Ownership Plan (ESOP) to their employees to give them a sense of ownership. These are unlisted shares which can be bought from the employees.
- There is a process called private placement by which you can directly purchase unlisted shares from the promoters of a company. Promoters sell their shares to some people depending on some particular requirements.
- There are online websites that give you the option to directly buy unlisted stocks. Some new start-ups also make it easy to buy such stocks right from their website.
Risks of trading unlisted stocks
Risks of investing in unlisted stock market is quite more than the risk which is associated with investing in listed stocks. Companies that issue unlisted shares do not fulfil the criteria related to size, profits and other requirements that increases the risk. These companies have highly speculative and risky business plans, and under capitalized. There idea may not be that strong enough to achieve success. Along that, there are risks related to counterparty and interconnections. Liquidity is also a major problem. And, since there is not any formal stock exchange for dealing and managing the trade system, you have to rely on the reputation of the dealing website concerning obligation regarding completion of the transactions, delivery of shares, payments, and other responsibilities.
Before you invest in unlisted shares, you must keep in mind these concerns too.