Unlisted security is referred to as a financial instrument that is vended over the counter but doesn’t meet formal trading requirements. Unlisted securities exchange is a process facilitated for trading in the OTC market by the market traders. These are not traded on any of the stock exchanges.
Types of Unlisted Financial Instruments
- On the OTCBB (Over-the-counter Bulletin Board) or pink sheets, common stock is the most usual unlisted security traded.
- Common stock includes penny stocks that are traded at low prices.
- In the OTC market, corporate bonds, government securities, and derivative products like swaps are few unlisted non-stock instruments.
Unlisted security derivatives are now traded in two types of market: over-the-counter and central trading exchanges like NSE (National Stock Exchange), BSE (Bombay Stock Exchange), and MCX (Multi Commodity Exchange of India Ltd.). In the year 2020, NSE emerged as the largest derivatives exchange in the world.
Types of OTC Derivatives
- Interest rate derivatives:
- Swaps trading is an OTC trading through the exchange of cash flows over a period of time.
- Commodity derivatives:
- This category acquires physical commodities like gold, food grains, etc. Forward contracts fall under commodity derivatives in the OTC market.
- Equity derivatives:
The equities are underlying assets. Options and Futures fall under equity derivatives.
- Forex derivatives :
- The movement in foreign exchange rates is the underlying assets of forex derivatives.
Fixed Income derivatives:
- The fixed income securities are traded through fixed income derivatives in the OTC market.
- In this trading, credit risk is transferred to another investor without exchanging any underlying asset. Credit Default Swap (CDS) and Credit Linked Notes (CLNs) are its examples.
To be listed on the exchange market, securities must have to follow the requirements. The regulatory norms of the exchange ensure high-quality trading. Therefore, unlisted securities tend to be at higher risks. The transparent electronic quotation has facilitated more liquidity and updated information to the traders.
Beholders of unlisted shares:
- Employees of the company
- Promoters of the company
- Angel investors
Brokers or dealers are liable for unlisted securities trading. The stocks’ valuation is done among them and the investors in the market get information through the OTC bulletin board which is an inter-dealer quotation system. Listed securities are more liquid in comparison to unlisted securities. Sometimes, the illiquid cash flow in the market vacillates buyer’s interest and they exit early and such investment is qualified for short-term capital gain. Large investors are the substratum of companies, so, businesses need them in all aspects and accordingly strategize for their benefits as well.
Since the unlisted shares of start-ups are presumed to be of higher value in the near future, long-term investors set out their interest in undervalued shares. These shares are also traded on NSE under certain requirements.
Investors can buy and sell unlisted shares only through SEBI (Securities and Exchange Board of India) verified members. When you are interested to buy such stocks, conduct thorough research of the company and make sure they comply with the legalities and trading regulations manifested by the state.