Listed Shares vs. Unlisted Shares: Understanding the Differences

Understanding the distinction between listed vs. unlisted shares is crucial for investors. Listed shares are traded on recognised stock exchanges, providing liquidity and transparency. Unlisted shares, however, are not traded on public exchanges, making them less liquid. This guide will explore the definitions, characteristics, and key differences between listed and unlisted shares, along with factors to consider when choosing between them and examples to illustrate their unique aspects.

Explaining listed and unlisted shares

Shares can broadly be categorised into listed and unlisted shares. Listed shares are those that are traded on a recognised stock exchange, offering high liquidity, transparency, and regulatory oversight. On the other hand, unlisted shares are not available for trading on public exchanges, resulting in lower liquidity. Understanding these categories is essential for making informed investment decisions.

What are listed shares

Listed shares refer to the stocks of companies that are publicly traded on recognised stock exchanges. These shares are subject to stringent regulatory requirements and provide high transparency and liquidity. Investors can buy and sell listed shares with ease, benefiting from the established market mechanisms that ensure fair pricing and efficient transactions.

Pros and cons of listed shares

Here are the pros and cons of listed shares-

Pros

• Access to capital: Listed companies can raise capital by issuing shares to a wide range of investors, enabling them to fund expansion, research, and other strategic initiatives.
• Liquidity: Shares of listed companies can be easily bought and sold on the stock exchange, providing liquidity for shareholders. This makes it easier for investors to enter or exit their positions.
• Market visibility: Listing on a stock exchange increases a company's visibility and credibility, attracting the attention of analysts, institutional investors, and the media.
• Employee benefits: Listed companies can offer stock options and share purchase plans to employees, aligning their interests with those of shareholders.

Cons

• Market volatility: The share prices of listed companies can fluctuate due to factors beyond the company's control, such as economic conditions and geopolitical events.
• Short-term pressures: Publicly traded companies may face pressure to meet short-term earnings expectations, potentially compromising long-term strategic goals.
• Increased regulatory burden: Listed companies are subject to more stringent regulatory requirements and reporting standards, which can be time-consuming and costly.

What are unlisted shares

Unlisted shares refer to shares of a company that are not traded on a public stock exchange. These shares are typically traded privately, often over-the-counter, between specific individuals or institutions. While a company may be a public limited company, it doesn't necessarily need to be listed on a stock exchange. This means that its shares can be traded privately, making them unlisted.

Pros and cons of unlisted shares

Here are the pros and cons of unlisted shares-

Pros

• Access to Capital: Listed companies can raise capital by issuing shares to a wide range of investors, enabling them to fund expansion, research, and other strategic initiatives.
• Liquidity: Shares of listed companies can be easily bought and sold on the stock exchange, providing liquidity for shareholders. This makes it easier for investors to enter or exit their positions.
• Market Visibility: Listing on a stock exchange increases a company's visibility and credibility, attracting the attention of analysts, institutional investors, and the media.
• Employee Benefits: Listed companies can offer stock options and share purchase plans to employees, aligning their interests with those of shareholders.

Cons

• Market Volatility: The share prices of listed companies can fluctuate due to factors beyond the company's control, such as economic conditions and geopolitical events.
• Short-Term Pressures: Publicly traded companies may face pressure to meet short-term earnings expectations, potentially compromising long-term strategic goals.
• Increased Regulatory Burden: Listed companies are subject to more stringent regulatory requirements and reporting standards, which can be time-consuming and costly.

How unlisted shares differ from listed ones

Unlisted shares belong to companies that are not publicly listed on stock exchanges. These shares are typically held by a small group of investors, including founders, employees, and private equity investors. Unlisted shares offer limited liquidity as they cannot be easily bought or sold on public markets. Valuation of unlisted shares is often more challenging and less transparent compared to listed shares, making them a riskier investment option.

Key differences between listed and unlisted shares

1. Liquidity: Listed shares offer high liquidity due to their availability on public exchanges, whereas unlisted shares have limited liquidity.
2. Transparency: Listed shares provide greater transparency with regular financial disclosures, while unlisted shares lack this level of transparency.
3. Regulation: Listed shares are subject to stringent regulatory review, whereas unlisted shares face less rigorous regulations.
4. Valuation: Valuation of listed shares is straightforward and market-driven, while unlisted shares can be challenging to value accurately.
5. Accessibility: Listed shares are accessible to the general public, whereas unlisted shares are typically restricted to private investors.

Factors to consider when choosing between listed and unlisted shares

1. Risk tolerance: Assess your risk tolerance, as unlisted shares are generally riskier due to their lower liquidity and transparency.
2. Investment horizon: Consider your investment horizon; unlisted shares may be suitable for long-term investors with a high-risk appetite.
3. Liquidity needs: Determine your liquidity needs, as listed shares provide easier access to funds compared to unlisted shares.
4. Diversification: Evaluate the role of these shares in your portfolio diversification strategy.
5. Regulatory environment: Understand the regulatory environment governing both types of shares to make informed decisions.

How to invest in listed shares

To invest in listed shares, you'll need to follow these basic steps:

1. Open a demat and trading account: This is where your shares will be held electronically, and you'll use the trading account to buy and sell them.
2. Choose a broker: Select a reliable stockbroker to manage your investments.
3. Fund your account: Transfer funds from your bank account to your trading account.
4. Research and select stocks: Identify companies you want to invest in based on their financial performance, future prospects, and your risk tolerance.
5. Place orders: Use your trading platform to place buy or sell orders for the chosen stocks.
6. Monitor your investments: Keep track of your portfolio's performance and make adjustments as needed.

How to invest in unlisted shares

Investing in unlisted shares involves buying shares of companies that aren't publicly traded on a stock exchange. Here's how you can do it:

Identify opportunities: Research promising unlisted companies with strong growth potential.

1. Direct investment: Connect with the company directly or through intermediaries to purchase shares.
2. Employee stock ownership plans (ESOPs): If you're an employee of an unlisted company, you might have the opportunity to buy shares through ESOPs.
3. Private equity and venture capital funds: These funds invest in unlisted companies, offering a way to indirectly participate in their growth.

Examples

Example 1: An investor in listed shares enjoys high liquidity and regular dividend payments, making these shares a popular choice among retail investors.

Example 2: A tech startup, operating as an unlisted company, raises capital through private investors and venture capitalists. While it offers potential for high returns, it comes with higher risk due to limited liquidity and transparency.

Conclusion

Understanding the differences between listed and unlisted shares is crucial for making informed investment decisions. Listed shares offer liquidity, transparency, and regulatory oversight, making them suitable for most investors. Unlisted shares, while riskier and less liquid, can offer significant returns for those with a higher risk appetite and a long-term investment horizon. By considering factors such as risk tolerance, investment horizon, and liquidity needs, investors can make the right choice between listed and unlisted shares to align with their financial goals.