Investing in pre-IPO stocks, which are also known as unlisted shares, can be an exciting option for anyone looking to get into the fast-paced world of equity markets. Before going into the details of this subject matter, let’s understand what pre-IPO stock is. Well, these stocks refer to a company’s shares that are offered before they are publicly traded. This investment opportunity, while attractive, is not without complications. As the financial environment evolves, understanding the dynamics of pre-IPO businesses becomes increasingly important if you are an investor looking to diversify your portfolios effectively. So, read on to learn more!
The Advantages of Investing in Unlisted Shares
Investing in pre-IPO shares can provide several benefits, making it an appealing option for experienced investors. Here are several major advantages:
- Possibility for Substantial Profits
One of the most appealing aspects of pre-IPO investments is the potential for substantial returns. Historical data suggests that companies that go public can experience good returns. In some exceptional cases, early investors have seen returns exceeding 100% as the company grows and gains market traction.
- Variety of Investment Portfolio
Pre-IPO stocks enable investors to diversify their portfolios beyond traditional public equities. By adding these stocks, you can spread risk across different asset classes, potentially insulating your portfolio from the volatility of public markets.
Sector diversification can also be achieved, as pre-IPO companies often belong to emerging industries such as technology, biotech, and renewable energy.
- Early Entry to Emerging Businesses
Investing in pre-IPO companies typically entails getting in on the ground floor of the next big thing. By investing early, you may be able to support and profit from ground-breaking technologies that revolutionise the market landscape.
- Greater Authority and Impact.
When investing in unlisted shares, particularly through private equity, investors may have greater control over company decisions. This involvement might include voting on important choices like board appointments or future fundraising rounds. It gives you a stronger sense of ownership and participation in the company’s development.
- Lower Volatility in the Markets
Pre-IPO shares are less volatile than publicly traded stocks. This can be especially useful during periods of economic uncertainty when public stocks might be extremely volatile. Pre-IPO shares typically have a more stable investment environment due to their lower trading frequency and lack of herd behaviour.
Essential Factors for Including Pre-IPO Stocks in Your Portfolio:
While the advantages of pre-IPO stocks are appealing, there are some important factors to consider when adding these investments to your portfolio:
- Insufficient Information and Visibility
Pre-IPO companies often provide less financial information than public companies. This lack of openness might make it difficult to determine the company’s true financial condition and prospects. So, you must do extensive due diligence to reduce the risks associated with this information gap.
- Liquidity
Pre-IPO shares are frequently illiquid, which means they cannot be easily purchased or traded. This illiquidity might be a two-edged sword. On the one hand, it opens up the possibility of bigger profits. Still, it may also make it harder to cash out when necessary. Depending on the company’s growth trajectory, you may be locked in for longer than anticipated.
- Tax Implications
Investing in unlisted shares may also have special tax consequences. For example, if the company becomes lucrative quickly, you may incur high capital gains taxes when you sell your stock. Understanding the tax environment around pre-IPO investments should be part of your overall plan.
- Greater Likelihood of Loss
The start-up ecosystem is notoriously unpredictable. Numerous start-ups fail during their first five years. While investing in pre-IPO equities has the attraction of large returns, it’s important to remember that you are also taking on a higher risk.
- Assessment Problem
Determining the appropriate valuation for pre-IPO stocks can be difficult. Unlike established corporations with significant financial histories, start-ups sometimes rely on assumptions and estimates that may be too optimistic or inaccurate. So, use caution when considering these valuations, and seek advice from qualified experts wherever available.
- Not Enough Access for Regular Investors
Access to pre-IPO companies has traditionally been limited to institutional investors and high-net-worth individuals. However, recent advancements have begun to democratise access, allowing more investors to participate. However, you may still face access restrictions, such as minimum investment requirements or restricted platforms.
How to Buy Unlisted Shares
If you want to add pre-IPO equities to your investment portfolio, you must understand how to buy them. Here are a few common methods:
- Secondary Market
Secondary marketplaces are one option for investing in pre-IPO stocks. Platforms like Incred Money allow investors to buy shares from present stakeholders, such as employees or early investors. This strategy gives you access to shares that may have increased in value even before the company goes public.
- Directly From Employees
Employee Stock Ownership Plans (ESOPs) can also be a profitable way to acquire pre-IPO stocks. When employees elect to sell their options, you may be able to purchase the shares immediately. This not only allows you to invest in a potentially profitable business, but it also assists employees in realising the benefits of their hard work.
- Directly From Promoters
Another option is to negotiate with company promoters or founders actively. This strategy may necessitate networking inside industry circles, but it can lead to unique investment opportunities. It is critical to undertake thorough due diligence before proceeding with this method of purchase.
- PMS and AIF Schemes
Portfolio Management Services (PMS) and Alternate Investment Funds (AIF) that specialise in unlisted shares can also provide an entry point into the pre-IPO investment area. These funds often employ experienced fund managers who filter through investing prospects. They can give you professional advice and access to pre-IPO stocks that might otherwise be unavailable.
Navigating the pre-IPO companies can be both exhilarating and challenging. While the prospect of large profits, diversification, and early access to breakthrough companies may make these investments tempting, the associated risks and considerations are also important. The idea is to strike a balance between these benefits and drawbacks.
Before making any pre-IPO investments, undertake thorough research, evaluate your financial circumstances, and consider seeking guidance from financial professionals. Remember that the investment journey is never-ending, and each new piece of information puts you closer to becoming a more knowledgeable investor.
Continue to explore; who knows what opportunities await you around the corner!
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Hi Mr Suresh,
Are ‘digilocker’ safe to create an account and upload my KYC documents like Aadhar, Voter etc in the ‘digilocker’?
What you may do most prefer , to upload KYC documents at ‘ Incred Money’ through ‘Digilocker’ or manual upload?
Thank you for your valuable advice in advance.
1) Is DigiLocker Safe?
– Yes, DigiLocker is secure with government backing, encryption, and two-factor authentication.
– Documents are authentic and shared only with your consent.
2) DigiLocker vs Manual Upload for Incred Money**
DigiLocker
– Fast and seamless.
– Reduces errors and ensures document authenticity.
3) Manual Upload
– Direct control over documents.
– May face delays and risks of rejection if scans are unclear.
Recommendation
– Prefer **DigiLocker** for speed and reliability.
– Choose **Manual Upload** if you’re cautious about linking accounts.
is there any PMS and AIF Schemes that are available to buy instead of directly procuring them, its better if any NFO or that agency details can be given that can help to organize this play too.
Hi Mr Sureh,
Thank you for all type of information.
Another query, you may please reply.
I have noticed ‘Incred Money’ is seeking the KYC. And there need to do ” ‘Verify PAN’, ‘Upload Documents’, ‘Verify Bank Account’, ‘Link Demat Account'”.
Please advise me, are there any potential risk to give those information at ‘Incred Money’ for KYC(specially ‘Demat Account’ and ‘Documents’ and Bank details) ?
I am waiting for your valuable advice. And Thank you again.
As part of KYC process they are asking you to provide these details. You are verying them and not providing any passwords or credit card details or login details. If you see any such steps either in this platform or any other platforms, you should not provide the same.
Are ‘Incred Money’ secured so that we can buy unlisted share through this? Or have potential risk.
I am not talking about ‘seller not available’ like that. I am talking about , If I buy a unlisted share through ‘Incred Money’ , whether at least investment will be reached to the valid company.
Hello Mitra, This is just a platform. Once you purchase unlisted shares, these would be credited to your demat account. All demat accounts are with NSDL or CDSL which are managed by Govt of India.