1. Overexposure: Putting Too Much Money into Unlisted Shares
Why This Happens:
- The attraction: Unlisted shares can appear extremely lucrative, especially during a pre-IPO or startup boom. Investors may be drawn by the potential “big win” stories.
- Lack of diversification discipline: Some retail investors treat unlisted shares like any other equity and allocate a large portion of their capital, ignoring the illiquidity.
Risks & Consequences:
- Liquidity risk: Unlisted shares often don’t have a ready secondary market, so even if the company is doing well, selling your shares may take a long time or be difficult.
- Valuation risk: Without a public market, pricing can be opaque; you may pay a premium based on hype, not fundamentals.
- Concentration risk: If a big chunk of your portfolio is tied up in these shares and the company fails to list or grow, it’s a big hit.
How to Avoid It:
- Treat unlisted share investments as a small portion of your overall portfolio — a “high-risk, high-reward” slice, not core capital.
- Set clear allocation limits (for example, no more than X% of your total investable portfolio in unlisted equity).
- Maintain liquidity elsewhere (public equities, cash, other tradable assets), so you don’t feel forced into a bad exit.
2. Falling for Hype / FOMO (Fear of Missing Out) Before an IPO
Why This Happens:
- Media buzz, social media, and “whisper networks” fuel excitement: Pre-IPO companies often generate huge hype, especially in high-growth sectors.
- Investors may believe they’ll “miss the rocket” if they don’t invest early.
Real‑World Examples & Risks:
- There are real investor warnings: Retail investors have been cautioned by market players not to get carried away just because a company is expected to IPO. For instance, unlisted valuation often doesn’t translate into the same IPO valuation or public listing premium. (As per investor commentary.)
- Even after IPO, listing price or performance may disappoint. For instance, some IPOs come in at lower-than-expected valuations compared to unlisted grey-market valuations — meaning early unlisted investors may actually lose money relative to what they paid. This has happened in some cases
- Hype-driven investments may overlook fundamentals: growth runway, cash burn, business model, management strength, and exit strategy.
How to Avoid It:
- Do fundamental diligence: don’t just rely on rumors. Investigate financials, business model, management credentials, and past funding history.
- Be skeptical of “too good to be true” valuations: Compare the unlisted valuation with similar public companies or recent funding rounds.
- Create a discipline-based investment plan: Decide whether you’re investing for the long term (IPO or further growth) or for a potential short-term pop (which may or may not come).
3. Not Having a Clear Exit Plan
Why This Happens:
- Many unlisted investors assume an IPO is inevitable or imminent, but that’s not guaranteed.
- Some don’t think deeply about how or when they can sell: they “hope for IPO or buyback” without concrete strategy.
Risks & Consequences:
- Inability to liquidate: Because unlisted shares lack standard markets, you may find it hard to find buyers when you want to exit.
- Forced exit at unfavorable terms: Without planning, you might end up accepting a lower price or get stuck in unstructured secondary sales.
- Opportunity cost: Money locked up in an illiquid investment means missed chances elsewhere.
How to Avoid It:
- Define your exit routes upfront: Possible scenarios include IPO, secondary sale (via regulated platforms), or buyback.
- Evaluate exit feasibility: Ask whether the company has announced IPO plans or buyback policy, or whether there is an existing secondary market.
- Set trigger points or timelines: For example, decide to exit if certain milestones aren’t met within X years, or if liquidity doesn’t improve.
- Re-evaluate periodically: As the company evolves, re-assess whether your exit assumptions still hold true.
4. Using Unverified / Unregulated Platforms
Why This Happens:
- The appeal of “easy access”: Some platforms offer unlisted shares conveniently or aggressively market them to retail investors.
- Lack of awareness: Investors may not know which platforms are regulated vs. those operating in a legal grey zone.
Risks & Consequences:
- No regulatory protection: According to SEBI, many unregistered electronic platforms facilitating trading in unlisted securities are not recognized by it.
- Loss of grievance rights: Investors using such platforms may not be covered under SEBI’s or exchanges’ dispute resolution mechanisms (smartodr) if something goes wrong.
- Legal risk: Some activities on unregulated platforms may violate the Securities Contracts (Regulation) Act, according to SEBI.
- Lack of oversight: These platforms may not follow investor-protection norms, and risk of fraud or misrepresentation is higher.
How to Avoid It:
- Verify platform credentials: Before investing, check if the platform is authorized by SEBI or an authorized intermediary.
- Use only recognized channels: SEBI suggests using only recognized stock‑exchange platforms or SEBI‑registered intermediaries.
- Avoid sharing sensitive data: Do not provide personal / financial information on platforms whose authenticity you cannot verify. SEBI specifically warns against it.
- Report suspicious platforms: Use SEBI’s Market Intelligence portal if you spot unregistered platforms.
5. Ignoring Liquidity Risk
Why It’s a Mistake:
- Many investors wrongly assume that because they hold shares, they can sell them easily later. But unlisted companies do not guarantee a liquid secondary market.
- The expectation of a “quick flip” or “fast exit” can be unrealistic.
Risks & Consequences:
- You may hold for years waiting for an exit opportunity.
- Buyers might demand a large discount because of the illiquidity, hurting your returns.
How to Avoid:
- Be realistic: Plan for long-term holding unless the company has a well-established mechanism for liquidity.
- Investigate secondary market presence: See if there are known platforms or historical trades for that company’s shares.
- Negotiate exit rights: If possible, in your investment deal, try to secure rights like put options, tag-along rights, or buyback clauses.
6. Overlooking Valuation & Due Diligence
Why This Happens:
- Hype and FOMO can lead to ignoring fundamentals.
- Unlisted valuations sometimes lack transparency; financials may not be up to date.
Risks & Consequences:
- Overpaying for shares: You might buy at inflated valuations not justified by business performance.
- Hidden liabilities: Without proper due diligence, you may miss risks like cash burn, debt, or poor corporate governance.
How to Avoid:
- Perform rigorous due diligence: Analyze financial statements, understand business model, check funding history, profitability, and burn rate.
- Use online investor community insights: Many investors on Reddit or forums talk about key checks before buying unlisted shares. For example:
“What are the 5 Checks you should see before buying Unlisted Shares? … Check 3: Exit Route – IPO plans or Buyback options”
- Compare with similar companies: Benchmark the valuation against comparable public or private companies.
7. Trusting Influencers or “Finfluencers” Blindly
Why This Happens:
- Some social media personalities or “finfluencers” aggressively promote unlisted share deals.
- Retail investors may trust them without validating whether they have a fiduciary or advisory responsibility.
Risks & Consequences:
- Potential for fraudulent promotions: Some influencers may have undisclosed ties to platforms or brokers.
- Bad decisions: Following hype from such influencers can lead to overpaying or investing in bad deals.
How to Avoid:
- Verify influencer credibility: Check their background, disclosures, and track record.
- Don’t invest just based on a recommendation: Use it as a starting point for your own research.
Insist on transparency: Ask for audited documents, shareholder rights, and exit mechanisms, regardless of who referred you.
8. Using Unsuitable Capital (e.g., Credit, Leverage)
Why This Happens:
- Some investors may be tempted to use borrowed money (credit) to buy unlisted shares, thinking of them as “sure bets.”
Risks & Consequences:
- High danger: If the investment doesn’t go well, not only do you lose money, but you also owe interest or credit repayment.
- Regulatory risk: Using credit cards or leverage for speculative investments might violate certain norms or lead to risky financial behavior.
How to Avoid:
- Use only risk capital: Invest money that you’re prepared to lock in or potentially lose; don’t borrow for speculative unlisted investments.
- Check legal / regulatory norms: Make sure how you’re funding your investment is compliant with regulations or broker policies.
- Prioritize safety and long-term thinking over leveraged trades.
Summary: Why These Mistakes Matter
- Unlisted shares can offer outsized returns, but they come with significant risk.
- Many common mistakes stem from over-optimism, lack of information, or regulatory ignorance.
- Avoiding these mistakes requires discipline, due diligence, and realistic planning — especially around exit strategies and platform safety.