An unlisted security is a financial instrument that is traded on the over-the-counter market. If a company wants to list itself in any of the stock exchanges, it should be capable enough to generate revenue and meet the capital requirements. The standard exchange bodies of the listed shares filter the quality shares and facilitate highly secured trading. The unlisted stock price is negotiable for the investors and probably profitable if invested wisely.
Regulation of Unlisted Shares Market
Unlisted stocks are traded over the counter globally. In this trading process, both the buyers and sellers execute trading out of a formal stock exchange. Listed shares are regulated by NSE (National Stock Exchange) or BSE (Bombay Stock Exchange). But the transaction of unlisted shares is not regulated under any formal stock exchanges.
The buyers and sellers have to carry the credit risk along as these shares are shielded under a regulating body.
Being a decentralized market, the OTC market doesn’t have any physical existence. It functions within a network of investors, brokers, and shares issuing authority.
The intermediaries or brokers buy/sell the unlisted securities or commodities to transact them further to new interested buyers or sellers.
To facilitate successful trading, the brokers present their offers and requirements to the interested buyers and communicate directly. With a mutual settlement of buying or selling unlisted company shares at a favorable price, they align the deals.
Though Unlisted shares have the potential to boom in the market. For any commercial venture, unlisted companies can have an unlimited number of stakeholders to raise capital. The frequency of trading of unlisted shares is irregular hence they contain higher risks of capital washout.
Risks of investing in unlisted companies
Unlisted shares are beneficial to get higher ROI (Return on Investment) at a cheaper price yet they acquire higher risks. Know about these before investing:
- No standard regulatory framework
- The companies that are not capable of complying with the stringent listing requirements of the licensed exchanges issue their unlisted securities. There are certain listing standards that listed companies have to meet such as minimum capital requirement. Conversely, unlisted companies have no necessity to meet minimum standards.
- Unlisted securities are highly subjected to price manipulation as the market is handled by a single market maker. There can be false volume creation of trading inside by the brokers and investors know that once they buy these securities.
- existence of the formal market
As unlisted securities are traded on an informal market, hence they have a higher risk probability. The investors in unlisted trading feel troubled to sell their unlisted securities as there might be a lack of interested buyers due to risk factors. The respective people in the market facilitate direct trading.
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