If you have been investing or simply learning about investments for a little while, you might have come across something called “unlisted stocks”. These are basically stocks that are not listed on any major stock exchange but in this article, we are not going to talk about what they are, we are going to be talking about why you should never buy unlisted stocks.
Buying unlisted stocks is more than risky, it is silly. There is a reason they are not available on the major exchanges, one being, they might not be very good companies to invest in. There is not enough demand to cause them to build huge capital, and the businesses are usually very unpredictable.
IPOs are commonly launched on major exchanges, a company that has fallen off, or failed to meet the exchange’s regulations is more likely than not, in serious trouble. With all of that being said, we are going to talk about the main reasons why you should never buy them in this article.
5 Reasons Why You Should Not Buy Unlisted Stocks
In this section, we are going to break down the 5 top reasons why buying unlisted stocks is not worth it. We will try and be as specific as possible. We will list the reasons here before going into detail. These 5 reasons are:
- No Regulation
- They are not Liquid.
- You Pay Higher Taxes on your Returns (if you get any).
- Counter-party Risk
An unlisted stock is stock from a company that is not listed on the IPO. This means that they have not gone through the process of passing all of the requirements needed for a company to go public yet. In the worst case scenario, they have tried but not did not meet the requirements needed to be listed on a major exchange.
In the latter case, there must be a reason why they did not meet the requirements and that is something that will be extremely difficult for you to investigate. Not all companies are as transparent as they may seem on the surface.
With this lack of regulation, you may have no knowledge of what is happening with the company internally behind closed doors. The actions of the people who run a company could have a severe impact on the value of a company.
While this could also happen with IPO’s, it is a lot less likely than with unlisted stocks.
They Are Not Liquid
If you are an investor with some experience, you will know exactly what the subheading means but for somebody who has less experience, don’t worry I’m going to explain exactly what it means in the section.
To keep it as simple as possible, liquid money means that you have some form of an asset, in this case, shares in a stock that can be easily converted into money. When it comes to an unlisted stock, you might struggle to find a buyer for that stock so in no way can your money be liquid when investing in unlisted stocks.
An unlisted stock is what they call an “over-the-counter stock” and most brokers do not deal with these but there are some dealers who do. However, dealers are not always going to want to buy your stock.
This is because they might struggle to find somebody else who wants to buy it. This is extremely dangerous. At the end of the day, you might be stuck with something that is constantly losing value.
In the worst-case scenario, you can end up losing your entire investment. That alone should be the end of this article as to why you should never buy unlisted stocks but let’s carry on.
You Pay Higher Tax On Unlisted Stock Returns
When it comes to unlisted stocks, stocks that are not registered on a stock exchange, you pay a higher tax on your return. So, even if you think that you are going to make more money when you sell the stock, remember that you will be paying about 20% tax as opposed to 10%.
So, if you have taken the risks and it is working for you in the sense that your stock or unlisted security has risen and you decide that you are going to sell it, you must remember to deduct the tax you have to pay and still see if you are actually making more profit then you would have by safely investing in a listed stock.
Basically, this section is going to be split up into two parts. We are going to talk about the paperwork involved and then what the risks are due to this paperwork in the next section which is called “counterparty risk”.
Because of the lack of regulation and certain other factors, there is a lot of paperwork involved when buying an unlisted stock. This paperwork involves pretty much everything to do with the company including references from financial institutions from whom the company has borrowed money from before.
All of this means that there will most likely be a delay from when you make an investment to when you receive the shares. Now let’s move on to the next section.
As we have discussed, there is a lot of paperwork involved in buying an unlisted stock and in most cases, as we mentioned above, you might have to wait a little while for your stock. Remember, this is after you have already invested your money.
There is no regulation on these unlisted stocks and you run the risk of never seeing the stock even though you have invested your money already. What can happen is you might never see that stock and the company can enter into a lengthy legal process in order to default on your investment.
This risk is rare, however, it is something that you need to be aware of. What I’m about to write about is widely known amongst most investors who have at least some experience. However, if you are a complete beginner, I think it is important to note one thing.
When you invest in a stock you are not lending somebody money. There is a pretty significant difference. Lending your money to someone or their business means that they will pay you back, the interest and loan duration depends on your agreement.
When you invest in a stock, you are putting your money on the line and there is an agreement that the company will pay you out dividends. If the value of the company decreases you might get no returns at all and your money will be lost.
What If You Choose To Invest in an Unlisted Stock?
The first thing that you need to do is to get references and you need to then check the legitimacy of those references. You also need to go through a company’s history and if you can, you want to look at the employees, their qualifications, and a little bit about their professional history.
This might seem like a lot of work but it is you that is going to risk your money on this company and it is important to remember that behind every company is a person and you need to know as much about that person, their company, and their history as you possibly can.
You also need to do enough research to determine whether or not what the company is offering, whether it be a service or product, is wanted by the public. You need to know who their competitions are and what their competition is doing differently to them.
like I said, that is a lot of work but this is coming from somebody who says that you should never invest in unlisted stocks. So, I am sure that you can understand why I would tell you to do as much work as possible when considering investing your money this way.
That brings us to the end of this article and hopefully, I have managed to convince you that buying unlisted stocks is not worth the risk. Yes, in some cases you might be able to make a lot of money but in most cases, you might be losing a lot of money.