Introduction

Investing in unlisted shares presents a lucrative but challenging landscape. One of the Key Risks in Unlisted Shares that often evades the spotlight is liquidity risk. This blog aims to demystify this critical aspect, using NSE Unlisted Share and Bharat Hotel Unlisted Share as examples to bring a practical perspective.

A) What is Liquidity Risk?

Liquidity Risk in Unlisted Shares is the challenge an investor faces when attempting to buy or sell shares due to the absence of a centralized marketplace. In unlisted markets, trading volumes are generally low, leading to a wide bid-ask spread, which can adversely affect both buying and selling prices.

B) Why Liquidity Risk is a Major Concern?

Limited Market Participants

Unlike listed shares that enjoy a vast and active market, unlisted shares are often confined to a smaller pool of institutional and high-net-worth investors. This limitation makes the shares less liquid.

Inventory Risk for Dealers

Dealers in unlisted shares often hold these shares on their balance sheets. This practice increases their own risk exposure and forces them to operate on a safety margin, which can widen the bid-ask spread.

Price Volatility

A direct consequence of low liquidity is high price volatility. Shares with limited buyers and sellers can experience extreme price swings, making them riskier investment options.

C) Understanding the Market Dynamics Through Real-world Examples

Case Study 1: The Rise and Fall of Bharat Hotel Unlisted Shares

In 2018-19, the Bharat Hotel Unlisted Share was a darling among investors. Its upcoming IPO and stellar sector performance had driven the share price to ₹400. However, the IPO never materialized, and the COVID-19 pandemic in 2020 wrecked havoc on the hospitality industry, causing the share price to plummet to ₹150. The stock remained dormant for almost three years until the sector showed signs of recovery in 2023, and the share price climbed back to ₹250.

Lessons Learned

The Bharat Hotel case teaches us the importance of not solely relying on IPO plans or sector trends. Investors must carry out due diligence and be prepared for unexpected market turns that can lead to liquidity drying up.

Case Study 2: The Sustained Success of NSE Unlisted Shares

On the opposite end of the spectrum, we have NSE Unlisted Shares, which have consistently defied liquidity risk. Priced at ₹1000 in 2019-20, the share has seen a remarkable growth, standing at ₹3300 today. Strong financials, including robust growth in revenue, EBITDA, and PAT, have kept this share in high demand. Additionally, the prospects of an upcoming IPO have only made it more appealing.

Lessons Learned

The NSE case highlights the importance of strong fundamentals and business models. Even in the absence of a formal market, shares with strong underlying businesses maintain liquidity.

D) Strategies to Mitigate Liquidity Risk

In-Depth Research

Understanding the company's fundamentals, including its balance sheet, cash flows, and growth prospects, can offer insights into its liquidity.

Portfolio Diversification

Diversifying your portfolio across sectors and risk levels can help mitigate the impact of liquidity risk on your overall investment.

Consult Experts

The complexity of the unlisted market often requires specialized knowledge. Consulting experts can provide valuable insights and recommendations with players like UnlistedZone for buying unlisted shares.

Conclusion

Liquidity risk is a significant concern in the unlisted share market but is not insurmountable. A well-researched and diversified portfolio can go a long way in mitigating this risk. The contrasting tales of NSE and Bharat Hotel unlisted shares serve as vital lessons for investors looking to navigate the often tumultuous waters of unlisted markets.