The buying and selling of unlisted shares has gained momentum as investors seek early-stage opportunities in promising companies before they go public. However, one of the biggest challenges that investors face while selling unlisted shares is the issue of liquidity. Unlike listed stocks that can be easily traded on stock exchanges, unlisted shares often lack an active secondary market, leading to liquidity traps that can significantly impact investors’ returns.
In this blog, we will discuss liquidity traps in the unlisted shares market, how they affect investors, and strategies to avoid them.
What is a Liquidity Trap in Unlisted Shares?
A liquidity trap occurs when an investor is unable to sell their unlisted shares at a fair price due to a lack of buyers in the market. This situation can arise due to multiple factors such as poor market sentiment, lack of transparency in valuation, or regulatory restrictions.
Factors That Lead to Liquidity Traps
1. Lack of Market Demand
The secondary market for buying and selling unlisted shares is not as structured as stock exchanges like NSE and BSE. If the demand for a particular stock is low, investors may find it difficult to liquidate their holdings.
2. High Bid-Ask Spread
A significant difference between the buying price and the selling price (bid-ask spread) of unlisted shares can make it challenging for investors to exit at a reasonable valuation.
3. Regulatory Lock-in Periods
Regulatory bodies like SEBI (Securities and Exchange Board of India) impose lock-in periods for certain pre-IPO investors. If you hold shares acquired at a preferential price, you may not be able to sell them until a stipulated time period is over.
4. Lack of Transparent Pricing
Since unlisted shares do not trade on formal exchanges, their valuation is often opaque. If there is uncertainty about the company’s performance or financials, potential buyers may hesitate to purchase, leaving investors trapped.
Strategies to Avoid Liquidity Traps While Selling Unlisted Shares
1. Choose Companies with Strong Fundamentals
Before buying unlisted shares, research the company’s financial health, growth potential, and industry position. Investing in companies with robust fundamentals increases the chances of finding buyers in the secondary market when you decide to sell.
2. Leverage Secondary Market Platforms
Several online platforms specialize in the buying and selling of unlisted shares, such as:
- InCred Money
- Unlisted Zone
- Shares Cart
- Trade Unlisted
These platforms help connect buyers and sellers, improving liquidity in the unlisted shares market.
3. Diversify Your Investments
Rather than investing all your funds into a single unlisted company, diversify across multiple companies and industries. This minimizes the risk of getting stuck with illiquid stocks if one sector faces a downturn.
4. Negotiate Private Deals
Institutional investors, high-net-worth individuals (HNIs), and private equity firms often buy unlisted shares in bulk. Connecting with these investors through financial advisors or brokers can help you negotiate a direct sale at a competitive price.
5. Time Your Exit Wisely
Selling unlisted shares requires strategic timing. Monitor the company’s growth trajectory, IPO announcements, and market conditions. If a company is gearing up for an IPO, demand for its unlisted shares typically rises, providing better exit opportunities.
6. Be Aware of Tax Implications
Capital gains tax on selling unlisted shares varies based on the holding period. In India:
📌 Short-term capital gains (if held for less than 24 months) are taxed at slab rates.
📌 Long-term capital gains (if held for more than 24 months) attract 20% tax with indexation benefits.
Understanding these tax implications helps in making an informed decision regarding when to sell.
Conclusion
The buying and selling of unlisted shares can be highly profitable, but liquidity concerns remain a significant challenge. By choosing the right companies, leveraging secondary market platforms, and strategizing your exit, you can effectively avoid liquidity traps and maximize your investment returns.
For secure and transparent transactions, buy or sell unlisted shares with Incred Money, a trusted platform.
Sources
📌 Investing in Unlisted Shares – Risks and Rewards
📌 SEBI Lock-in Rules for Pre-IPO Shares
📌 How to Sell Unlisted Shares in India
📌 Capital Gains Tax on Unlisted Shares
📌 Unlisted Zone
📌 Shares Cart
📌 Trade Unlisted
