Unlisted stocks offer the chance for you to buy a stake in a company before its stock goes on sale to the public through general share trading. This is seen as an opportunity to potentially buy shares for a low price while the company is still in the hands of private investors, but there are some possible disadvantages you need to understand.
In some cases, these are known as pre-IPO shares. The IPO (initial public offering) is when a company’s shares are offered to investors, so getting in before this happens could offer the chance for lower prices and greater growth potential. We’ll be looking at how to buy pre-IPO shares and what else you need to know.
What Are Unlisted Shares and How Do They Work?
You might see the unlisted shares meaning described as unquoted shares or pre-IPO stock. These terms all mean something similar, as they aren’t traded on public exchanges, but with some differences.
What’s the key difference between quoted and unquoted shares? Once a share has been listed on an exchange, it changes from unquoted to quoted, since the price is now publicly quoted and transparent. This may follow an IPO, which explains why the pre-IPO name is also sometimes used for the earlier stage. However, not all unlisted shares are classed as pre-IPO. To be pre-IPO stock, the company must be planning to go public at some point in the future.
Pre-IPO Shares Explained: Meaning and How They’re Traded
Pre-IPO companies can offer stocks before going public. Companies decide to sell pre-IPO shares for a variety of reasons. They may do this to raise additional funds, to lower their debt level, or to bring investors on board before their stock exchange listing.
This is typically done by offering the shares to institutional investors, venture capitalists, and other high-net-worth investors. However, it is becoming more possible for individuals to access pre-IPO shares.
If a company decides to sell pre-IPO stock, this is likely to have a different price from the IPO itself. Early investors often expect to be able to buy at a discounted price when shares are unlisted and they buy directly from the company, since it’s classed as a riskier approach.
How to Buy Unlisted Shares and Pre-IPO Stocks
Since you can’t find these shares on standard exchange listings, you might wonder how to buy pre-IPO stock. They’re generally sold using a method known as over-the-counter (OTC). This means that they can be bought directly from existing shareholders or through angel investing services.
For most people, the simplest way to buy pre-IPO shares is through a platform that specialises in this type of investment. This is most accessible way to buy stock directly from the companies.
Risks and Challenges of Investing in Unlisted or Pre-IPO Companies
If you’re wondering how to invest pre-IPO, there are some possible risks to take into account. When you invest in pre-IPO companies, the low liquidity can be a challenge when you plan to sell. With no public exchange listing, there may be no easy access to a pool of buyers, which means that you may struggle to exit the trade.
The price may also be unclear in pre-IPO investing. Since you’re buying directly from the company, there’s no public price guide, and this means that the cost for pre-IPO investors to buy shares can vary greatly.
Listed stock needs to meet clear regulatory requirements, which are lacking when you invest in pre-IPO companies. So, you’ll find it difficult to access all of the relevant information about the company and their plans. Bear in mind that the sellers will have more information than you at this stage.
How to Sell Unlisted Shares and Pre-IPO Investments
If you plan to sell pre-IPO shares, this isn’t as easy as doing so on a general investment platform. One option is to wait until the IPO listing and look to sell them then. If you want to do so before it’s listed, there are options like secondary markets where private buyers might purchase them from. Some companies also offer buyback schemes, purchasing their stock back from early investors.
Pre-IPO Shares & Unlisted Stocks FAQs
Is Pre-IPO Investing a Good Idea?
Buying pre-IPO stock before it’s listed on an exchange involves a series of possible risks and benefits. While the price may be expected to rise over time, a lack of liquidity and unclear pricing may be among the drawbacks to take into account.
Can Unlisted Shares Become Listed?
Shares are listed following an IPO, which is why unlisted shares are often called a pre-IPO investment. However, not all unlisted shares are subject to an IPO, and not all IPOs are successful.
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