Pitfalls of Unlisted Shares Investment

Pitfalls of Unlisted Shares Investment

The investments in the companies that are not listed in the open market are unlisted shares trading. Unlisted or unquoted investments are generally issued at favorable prices by the investors. Unlisted companies being smaller in size have the most ambitious plans to soar with maximum profits in the trading market. To nurture and grow the potential of small-scale businesses, they need high investments to meet their capital needs. 

Unlisted companies are considered to be high-risk by angel investors, financial institutions, and individual investors. Despite knowing the risks involved, a large pool of investors jumps into the unlisted securities market. 

Here are the reasons for investors to be more inclined towards unlisted shares investment:

  1. Capital contraction

While investing, capital contraction is the most important concern of the investors. The amount of capital to invest in unlisted equities is accountable for the loss or profit of the investors. This drags them down and refrains them from investing even in potential shares. 

  1. Lack of liquidity 

The investment made through online platforms is highly illiquid. It implies that the investors can’t sell their shares until the respective business is not driven towards a successful exit and sustain the financial regularities with the existing funds. 

For small-scale businesses, it is difficult to retain customers for a long time with dreary financial status. While, even for successful businesses, a flotation or purchase is unlikely to happen for several years. Investors should stay for a long-term in the businesses to avail significant returns. 

  1. Dividends

The new-age businesses lack enough funds to pay dividends at the early stages. Instead, they re-invest the funds into the businesses and increase the overall shareholder value. Most successful businesses don’t pay dividends to the stakeholders and continue to invest again for more profitable returns. 

  1. Dilution

If you invest your funds through any platform, it could probably be diluted. Simply put, if businesses require funds at the later stages, the number of shareholders will increase and you are likely to get reduced profits as the investor in the respective company. 

The liberty provided to different investors in a company might be another reason for the investors for dilution of the stakes. Continuous reinvestment in the businesses is a safe option to increase the shareholder percentage. 

  1. Segmenting the investments

The start-ups and new-age businesses are at the ‘yet to execute their potential’ stage before the investors show interest in investing their funds. It might put the investors in the dilemma of whether to invest or not. Diversifying the investment portfolio is in the best interest of the investors. Equalizing large bricks of investments into multiple unlisted companies from various sectors over investing large chunks in one small company is not a wise perspective. The online platforms dilute a large portion of the investments of the stakeholders in the stage of raising funds.

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