A complete guide on unlisted equity shares

Ever wondered how unlisted companies grow in value? Even if they are unlisted on a stock exchange, their equity shares change hands, and the value is taken care of by the basic concept of supply and demand, explained by the father of economics, Adam Smith.

But the sea is quite deep than it seems. So, let's dig deeper and understand how unlisted shares are traded and how their value is determined.

What are unlisted shares?

Unlisted shares/stocks are those which, are not listed on conventional stock exchanges. Companies like OLA, Swiggy, and JIO are unlisted, though there is some news going around that JIO may launch its IPO in December 2022. But let’s keep that discussion for some other time.

The current topic of discussion: how is an unlisted equity share traded?

Unlisted stocks are traded on the Over-the-Counter (OTC) market. Here the trading does not take place through a clearing house. The buyer and seller directly trade the share through some intermediary.

Even though the unlisted shares are of well-known companies, it does not mean that they are highly profitable and less risky. Most of the unlisted shares are riskier than listed shares as there is a lack of transparency in their trading.

Other than this, the risk profile also depends on whether the company is planning to get listed soon or is more on the path of winding up. So before investing in any unlisted stock, investors shall do a thorough examination of the company's fundamentals and other variables.

Are unlisted shares available to all?

When it is mentioned that unlisted shares are traded via some intermediaries, it is mostly done between big brokerage houses, HNIs (High Net Worth Individuals), and companies. But that does not mean that an individual trader cannot partake in the trade. They can, but as said above, the only way to ensure that an informed decision is made, extensive market research is important. Also, if the intermediary through whom the trading is done, if they bear a good reputation in the market, the risk involved gets minimized.

Do not confuse unlisted and delisted?

While the two may sound somewhat similar, do not make the mistake of putting them under the same umbrella. Unlisted shares are those that are yet to be listed on stock exchanges, whereas delisted shares are those that were originally listed, but have since been removed from the category for various reasons.

While unlisted shares can be freely traded on the OTC market, delisted shares are completely removed from the trading market.

Valuation of unlisted shares

For unlisted stocks, there are six ways of estimating market value. Here four are briefly explained for better understanding:

1. Recent transaction price

Unlisted stock may trade from time to time, and the last traded prices at which the stock changed hands can be used. If the last traded price is more than a year old, then compliers may resort to using a different approach.

2. Own funds at book value (OFBV)

OFBV is the process of valuing a company based on its financial statements. Own funds at book value include the net value of non-distributed profits and losses, paid-up capital and all sorts of reserves.

3. Net asset value (NAV)

NAV = market value of total assets - the market value of total liabilities excluding equity. The two particulars' valuations should be based on recent appraisals.

4. Fair Market Value

The DCF (Discounted Cash Flow) approach is another means of estimating the value of unlisted shares. Fair Market Value = (Asset-Liability) * Present Value / Price to Earnings Ratio.

Trade Carefully

In the world of trading, unlisted shares can be a hidden gem, but the trick is to identify the gem and not just some shiny stone that will lose its value in no time. Instead of trusting word of mouth, do personal research and analysis before staking for an unlisted share.