In the olden times, quite a lot of people were hesitant to invest in the share market, be it listed or unlisted shares. However, the scenario has changed with the world and financial markets progressing. The increased transparency and supreme returns of the financial markets have been catching abundant attention with more and more people keen on placing their money in financial markets. Depending on the risk appetite and financial mindset one has, people choose the nature, timeline, amount, etc. of the shares to invest in.
While uncertainty has always been a part and parcel of investing in equity markets (Listed or Unlisted shares), Unlisted shares still remain the lesser favourite amongst many investors. For similar reasons, a handful of investors choose to invest in Start-Ups as well.
Arpit Arora, India’s leading Personal Finance Expert and a Passive Income Coach, explains if one should invest in Unlisted shares or, Start-Ups:
- More Genuine Opportunities: There are almost 8000 stocks listed on the National and Bombay stock exchange put together of which easily 3000-4000 companies would be unique. Knowing this fact there is a lot of opportunity and options to choose from in the listed space. However, when it comes to investing in start-ups and unlisted shares there are not many known options available. In this case, many investors of unlisted stocks, restrict themselves to the popular or widely known options which are already overpriced. This limits the possibility of making good profits in higher-risk investments such as unlisted shares and start-ups.
- Genuine Financials: Listed companies have to follow a lot of compliances to be listed on the stock exchange. When you have more compliances to adhere to, the possibility of genuine opportunities is much higher compared to Unlisted shares/Start-Ups. The financials and company documents are open to the general public to base their research on. Whereas, In the case of Unlisted companies/Start-Ups, one cannot place full confidence in the genuineness of their financials. Even in the listed space, there have been many scams and frauds by the promoters or the management which makes the unlisted space even worse as it’s not as tightly regulated. One such recent claim has happened with Bharat Pe. To sum it up, More Regulations mean More Safety!
- Benchmarking: Benchmarking is also a major factor in deciding if you should invest in Unlisted Shares or Start-Ups. In the listed space, we have indexes like NIFTY 50, and NIFTY 500 which is an amalgamation of the top-performing companies on the stock exchanges. However, in the unlisted space, it’s hard to find the top-performing companies, leaving aside the activity of benchmarking. The time and effort to spot the performers and non-performers would be way too high to even consider it to create benchmarks for individual shares. Thus, how would an investor even know if they are taking too high a risk for the returns they are getting without knowing who to compare their returns with?
- Diversification: As mentioned above, Indexes which are aggregators of top-performing companies across the country also provide us with the best possible diversification one can look for while investing. Creating a diversified portfolio such as an index would become terribly tedious with unlisted shares and Start-Ups.
- Risk Management: This is by far the most important reason why investing in unlisted shares and startups is a tricky road to go down. Listed shares offer their investors an ample amount of liquidity so that they can decide to exit any trade whenever they want. There is always a next buyer to take over the shares you want to sell. As a result, an investor can always choose the maximum amount of loss he/she wants to exit the market with. On the other hand, since there is limited buying and selling in unlisted shares and Start-Ups, it becomes really difficult for an investor to exit the market due to liquidity issues.
It is because of the above-mentioned determinants that Unlisted Companies or Start-Ups majorly have founders, owners, family, and friends as their shareholders than the general public. Therefore, The decision “Should you invest in Unlisted shares or Start-Ups?” should be based on a thorough examination of all the factors. To gain the maximum from the financial markets, staying aware of all the possible options that are available to you, becomes the most important. To go further on the path of financial freedom take this FREE financial assessment of your financial health in 2 minutes – www.askthewiseguy.in/fhc