Top 5 mistakes to prevent while trading in unlisted shares
Being a new investor in a different asset class, one needs to be cautious to avoid unnecessary losses. While one may not be able to avoid losses in all situations, it is always better to be aware of mistakes and thus prevent making mistakes that lead to losses. Some important mistakes are highlighted below, we hope our readers will avoid them.
- Poor fundamental research: The biggest mistake an investor can make is investing in a bad stock without doing adequate research. If you put money in a company without being aware of its profitability or authenticity of the promoters, you risk losing every single penny of it because these are ill liquid stocks. If the company does badly, its hard to sell.
- Buying from non-reputed brokers: Another big mistake is buying shares from un-reputed or un-trustable brokers. Many investors have given their money and never got their shares. This happens when the broker is not neutral or unauthentic. Any genuine broker must promise to deliver the shares and in worst case when a seller/buyer backs out, the broker must atleast return full capital deployed by the investor immediately or the shares of the seller.
- Investing for short term (less than 3 years): Many investors invest to get rich quickly. The unlisted markets need patience. The best growth in capital invested happens when the investor has invested in the entire life cycle of the company, i.e. from being an unlisted firm to becoming a listed firm. This may take anywhere between few years to even 20 years or more depending on when the investor has purchased the shares. An investor will certainly gain some money when the unlisted company grows but in the short-run, expecting high returns is a sure path to becoming disappointed.
- Correct wealth allocation: One should not invest more than 40 percent of one’s wealth since these assets are ill liquid. They will yield good returns but a person may need money based on uncertain life circumstances and hence its advised to invest based on ones disposable wealth keeping contingencies for uncertain needs.
- Paying a very high price: One must invest at the correct price apart from investing in the right company. A high entry price can shave off bulk of the returns in the short-term atleast. A proper study of comparable firms in the listed markets must be done before arriving at a price to be paid.