Comparison Between Listed and Unlisted Shares

Have you ever considered investing in a company but weren’t sure whether shares are listed or unlisted? It’s a common question for many investors. Some companies are all over the news with shares traded daily on the stock exchange, while others quietly operate behind the scenes, offering shares in private markets. But what does that mean for you as an investor?

Whether you’re curious about the opportunities in private investments or trying to navigate the public market, knowing how these two types of shares compare can help you make better decisions. 

This blog will explain listed and unlisted shares, their key differences, their value, and who invests in them. We’ll also cover the investment process, risks, rewards, and tax implications, helping you decide which suits your financial goals. 

Let’s get into it!

What is a Listed Share?

A listed share is a company’s stock that you can buy or sell on a public stock exchange,  such as the National Stock Exchange of India (NSE) or the Bombay Stock Exchange (BSE). When a company decides to go public, it conducts an Initial Public Offering (IPO), offering its shares to the public for the first time. 

Once the IPO is completed, the company’s shares are listed on one or more of these stock exchanges, making them accessible to investors. 

With listed shares in mind, it’s important also to understand unlisted shares.

What are Unlisted Shares?

Unlisted shares are shares of private companies that are not traded on public stock exchanges. You typically need to buy directly from the company or via ESOPs to invest in them. These shares are more complex to value and less liquid, making it difficult to sell them quickly.

After we’ve gone over the basics of unlisted shares, let’s look at the key differences between listed and unlisted shares.

Key Differences Between Listed and Unlisted Shares

When you’re deciding where to invest, it’s crucial to understand how listed and unlisted shares differ. These differences can impact how easily you can buy or sell shares and the risks and rewards you might face. To simplify it, let’s look at the main differences between listed and unlisted shares in an easy-to-follow way.

Now that you’ve clearly understood the key differences between listed and unlisted shares, it’s time to consider how each type is valued. The methods used to assess their worth can vary quite a bit, depending on whether you’re dealing with publicly traded shares or not.

Valuation Methods of Listed and Unlisted Shares

Valuing shares is essential to understand their worth and make informed investment decisions. Listed and unlisted shares are valued differently, and knowing how each is valued is important. 

Listed Shares

Listed shares are traded on the stock market, and market conditions determine their value. Here are the common methods used:

1. Market Price Method: The market price reflects the current trading value of the shares. It’s the easiest way to see what investors will pay for the stock.

2. Price-to-Earnings (P/E) Ratio: This ratio compares the share price to the company’s earnings per share (EPS). A higher P/E suggests future growth expectations, while a lower P/E might indicate undervaluation.

3. Discounted Cash Flow (DCF) Analysis: DCF calculates the present value of the company’s future cash flows. It helps you understand the company’s value based on its potential to generate earnings.

4. Dividend Discount Model (DDM): DDM is used for companies that pay dividends. It values the stock by estimating the present value of future dividends.

5. Comparable Company Analysis: This method compares the company to similar publicly traded companies using financial ratios like P/E or Price-to-Book (P/B) to determine value.

Unlisted Shares

Unlisted shares are not traded on the market, so their valuation can be more complex. Here’s how unlisted shares are typically valued:

1. Asset-Based Valuation: This method calculates the company’s value by subtracting liabilities from assets. It’s useful for companies with significant physical assets.

2. Earnings-Based Valuation: Earnings-based valuation uses the company’s earnings and a capitalization rate to determine value. It’s based on the expected return you can get from the investment.

3. Discounted Cash Flow (DCF) Analysis: DCF is also used for unlisted shares by estimating future cash flows and discounting them back to their present value. It requires accurate projections.

4. Net Asset Method: This method values the company based on its net assets, including both tangible and intangible assets. It gives you a look at the company’s intrinsic value.

5. Comparable Company Analysis: This method compares the unlisted company to similar public companies. It’s harder to do because of limited data, but it can still provide a useful estimate.

Having explored how shares are valued, the next step is understanding the ownership dynamics and identifying the typical investors in listed and unlisted shares.

Ownership and Investor Base of Listed and Unlisted Shares

Understanding the ownership structure and investor base is key to making informed investment decisions on whether shares are listed or unlisted. 

Listed Shares

Listed shares are owned by a wide range of investors, from individual traders to large institutions. Let’s take a closer look at who holds these shares.

1. Public Ownership: Listed shares are owned by a wide range of investors, including individuals, institutions, and foreign investors, giving you easy access to buy and sell shares.

2. Promoter Holdings: Promoters (founders or major shareholders) often retain a significant portion of listed shares, with some owning a substantial share in certain markets.

3. Regulatory Requirements: Public companies must disclose financial reports regularly, ensuring transparency and helping you stay informed.

Unlisted Shares

Unlisted shares tend to have a smaller, more concentrated group of owners. Here’s what you need to know about their ownership structure.

1. Private Ownership: Unlisted shares are typically owned by a smaller group, such as founders, family members, or private equity firms.

2. Less Regulatory Scrutiny: Unlisted companies face fewer regulations and don’t disclose as much financial information, making accessing detailed data harder.

Having discussed who holds these shares, let’s now take a closer look at the process of investing in both listed and unlisted shares.

Investment Process of Listed and Unlisted Shares

Investing in shares can be an exciting way to grow your wealth, but the process differs significantly between listed and unlisted shares. 

Listed Shares

Investing in listed shares is straightforward and involves a few simple steps that can be done through a broker or online platform. Here’s how you can get started:

• Choose a Broker: Pick a reliable brokerage with a user-friendly platform, good support, and low fees (e.g., Zerodha, Angel One). 

• Open a Demat & Trading Account: Set up a Demat account to hold shares and a trading account for buying/selling. Complete KYC with ID documents. 

• Fund Your Account: Deposit funds into your trading account via net banking or UPI. 

• Research and Select Stocks: Study companies’ financial health, growth potential, and news. 

• Place an Order: Decide how many shares to buy and at what price. Place a market or limit order. 

• Execute the Purchase: Confirm your order. Once executed, shares will be credited to your Demat account. 

• Monitor Your Investments: Regularly check your stocks’ performance using your broker’s tools. 

• Selling Shares: To sell, select shares, place a sell order, and confirm. Proceeds will be credited back to your trading account.

Unlisted Shares

Investing in unlisted shares is more complex and involves finding opportunities through private deals and negotiations. Here is the process for investing in unlisted shares:

• Identify Investment Opportunities: Find unlisted shares through private deals or specialized platforms like Precize, which allows investors to buy and sell unlisted shares of companies not yet traded on stock exchanges. 

• Conduct Due Diligence: Research the company’s financial health, business model, and management.  

• Invest through Precize: On the Precize platform, you can:

  • Select the company you wish to invest in.

  • Add funds via UPI or Net banking to your Precize account.

  • Confirm your investment and place an order.

• Receive Shares: After payment, shares are transferred to the depository account [CDSL/NSDL] in 24-48 business hours.

• Monitor Investment: Keep track of your portfolio’s performance in the Investment section of Precize account.

With the investment process covered, it’s time to evaluate the risks and potential rewards of investing in listed versus unlisted shares.

Risks and Rewards of Investing in Listed and Unlisted Shares

Investing in shares requires a strategic balance between risk and reward. Here’s a detailed look at the key risks and rewards associated with listed and unlisted shares.

Listed Shares

Listed shares come with risks and rewards that you should consider carefully before investing.

Risks:

• Market Volatility: Stock prices can fluctuate due to economic changes or investor sentiment, leading to potential losses.

• Regulatory Risks: Changes in regulations can impact the performance of listed companies.

• Liquidity Risk: While liquidity is generally high, market conditions can quickly affect your ability to buy or sell shares.

Rewards:

• Higher Liquidity: Listed shares are easy to buy and sell on stock exchanges, giving you flexibility.

• Transparency: Listed companies regularly disclose financial information, helping you make informed decisions.

• Potential for Capital Appreciation: Historically, Apple’s listed shares, for example, have shown significant growth and returns over the long run.

Unlisted Shares

Unlisted shares offer unique risks and rewards, which can differ significantly from those of listed shares.

Risks:

• Higher Business Risk: Unlisted companies need more scrutiny, which can lead to unknown operational risks.

• Limited Liquidity: Selling unlisted shares is harder due to fewer buyers and the absence of public exchanges. But with Precize, you can liquidate your unlisted holdings. They facilitate a buyer for your shares within 24-48 business hours. 

• Information Asymmetry: A major risk with unlisted shares is the lack of information, making it hard for investors to make informed decisions. However, Precize solves this by offering detailed research reports on private companies, helping investors make data-driven choices with confidence.  

Rewards:

• Potential for High Returns: Unlisted shares can offer significant upside, especially if the company grows rapidly or goes public.

• Less Market Volatility: Since they aren’t traded daily, unlisted shares are less affected by market fluctuations, offering stability during market turmoil.

Having covered the risk and reward aspects, let’s examine how taxes affect your investments in listed and unlisted shares.

Tax Implications of Investing in Listed and Unlisted Shares

Understanding the tax implications of investing in listed and unlisted shares is essential for investors in India. Both types of shares are subject to capital gains tax, but the rates and conditions differ significantly. Here’s a breakdown of how taxes apply to each:

Also, remember that you must report both Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) from unlisted shares in your Income Tax Return (ITR). 

Even if no transactions occurred during the year, unlisted equity shares must be disclosed in specific sections of ITR forms like ITR-2 or ITR-3. Additionally, when calculating capital gains for unlisted shares, the Fair Market Value (FMV) plays a crucial role:

• If shares are sold below FMV, the FMV is used for tax calculations under Section 50CA of the Income Tax Act.

• If shares are sold at or above FMV, the actual sale price is used for tax purposes.

Conclusion

When deciding whether shares are listed or unlisted, aligning your choice with your investment goals is important. Listed shares offer liquidity, transparency, and a more regulated market, but they can be volatile. Unlisted shares, on the other hand, offer higher potential returns with more risk, less liquidity, and fewer regulations.

If you’re interested in unlisted shares, Precize is a simple-to-use platform to invest in pre-IPO shares and global trade finance, helping you easily explore high-potential opportunities. Reserve Access now to start investing.