The unlisted share market is one of the neglected markets. However, it is one of the markets that operates on logic independent of the listed stock markets. The unlisted share markets do not have the listed share markets’ features of live ticker updates, daily circuit limitations, and centralized match orders.
In unlisted share markets, buyers and sellers transact privately, and the prices are set through negotiation. Information is communicated through networks and is not distributed in the order that it is received, like in the listed stock markets.
Because of these differences, unlisted market behaviour should be studied and not assumed. For example, the behaviour in the unlisted market may look dramatic if it is due to a large transaction.
However, this will not be a dramatic change in the sentiment of the market. The first step to understanding the behaviour of the unlisted market is to study how the unlisted markets operate, instead of assuming that they operate like the listed markets.
For readers interested in this field, our guide to unlisted shares is a great precursor to the market behaviours we describe below.
Table of Contents
- What is Unlisted Market Behaviour?
- How Prices Move in the Unlisted Share Market
- Factors That Influence Unlisted Market Behaviour
- Why Market Behaviour Differs From Listed Stocks
- Role of IPO Expectations in Market Behaviour
- How Demand and Supply Affect Unlisted Shares
- Understanding Behaviour Across Different Categories
- Common Mistakes While Interpreting Market Behaviour
- How Investors Can Study Market Behaviour
- Conclusion
- FAQs
What is Unlisted Market Behaviour?
Unlisted Market Behaviour describes the patterns and forces that cause prices in the unlisted share market to behave in a certain way. For example, the behaviour of unlisted market participants explains why the expected price of Private Company A has increased, while Private Company B’s expected price has remained the same, despite positive news regarding Private Company B.
Since private market shares are not listed on a central exchange, the behavior of the unlisted market participants is described as:
- Trades are conducted via direct bilateral negotiations between a buyer and a seller or an agent.
- Prices are reflected via the previous trades, and are not published continuously.
- The financial information and strategy of a company may not be published or disclosed.
- Compared to the volume and liquidity of exchange-traded securities, private market shares are less liquid and less frequently traded.
Due to these reasons, price movements in the unlisted markets are attributed to negotiations and market sentiment, unlike the real-time traded quotes on the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE).
How Prices Change in the Unlisted Share Market
In the unlisted share market, price changes are influenced by both company-specific factors and market-wide factors.
Demand and Supply
Unlisted shares are represented in very small quantities, so small changes in the number of buyers or sellers can change the indicative price. A lot of demand and supply for unlisted shares is seen mainly because of the interest among the investors, and is rarely due to any change in the fundamentals.
Company Financial Performance
Company performance is evaluated mainly because of revenue, profit, and the strength of the balance sheet. Investors usually focus on company performance even without the quarterly disclosures that are mandated by the exchange. Investors who focus on the annual reports and the filings are usually better positioned to understand the pricing better.
Expectations of an IPO
Expectations of an IPO can create interest among investors even before the formal filing. However, there is usually no guarantee that the IPO will happen in the expected time and in the expected manner.
Trends in Industry
Trends in a sector can create a perception of positive or negative impact in all the unlisted companies in that sector, even in the unlisted companies that are in the technology, renewable energy, financial services, or manufacturing sectors.
Investor Sentiment
The perception of unlisted companies, especially when there is a change in the price of listed shares, is influenced by the companies that are listed on the exchange, even if the fundamentals do not change.
Liquidity
Liquidity in unlisted shares is usually low. In unlisted shares, a large transaction can change indicative prices, compared to a smaller change in a listed stock.
Institutional Participation
The participation of family offices, PMS funds, and private equity investors is a sign of price stability and thorough due diligence.
Corporate Announcements
Changes to share structures through buybacks and rights issues, as well as changes to the board and strategic alliances, impact the perception of shares.
Factors That Affect the Behaviour of the Unlisted Market
Beyond price impacts, there are structural elements that influence the valuation of unlisted shares in the medium to long term.
- Business fundamentals — stability of core operations.
- Revenue growth — the consistency of revenue is important as opposed to one-off strong quarters.
- Profitability — trends in margins over several periods.
- Expansion plans — growth in geographic markets and/or growth in product lines
- Sector outlook — the impact of regulations on the sector, whether a tailwind or a headwind.
- Regulatory impacts — changes in the regulation of the sector by SEBI or other sector regulators.
- Funding impacts — the valuation of new rounds of funding.
- Market impacts — changes in strategic or institutional investors.
Unlisted company valuations are impacted by the interplay of multiple factors, which is why price determination requires context beyond a single factor.
Why Unlisted Share Market Behaviour is Different from Listed Stocks
The differences in structure between listed and unlisted share markets cause a large part of the gap in market behaviour.
| Market Parameter | Listed Stocks | Unlisted Shares |
| Trading Frequency | Every trading session | Periodically and negotiated |
| Transparency | Real-time disclosures | Limited public disclosures |
| Volatility | Driven by daily market sentiment | Driven by fewer and larger transactions |
| Price Discovery | Exchange order-matching mechanism | Negotiated between the concerned parties |
| Institutional Participation | Broad and continuous | Selective and deal-based |
| Availability of Information | Extensive and regulated disclosures | Fragmented information requiring detailed research |
The listed market operates under principles and logic that do not extend to the unlisted market, which is why readers misapply listed market instincts, such as daily price updates, to the unlisted market.
For example, people look for updates for NSE unlisted shares and MSEI unlisted shares, but the prices are frequently posted in the unlisted markets.
The Effect of IPO Expectations on Market Activity
Nothing moves the sentiment in the unlisted market like the expectations of IPOs. If a company is likely to go public, either through a market rumor or an actual public filing, the demand for its unlisted shares will go up.
The process generally includes the following:
- Posting of the DRHP (Draft Red Herring Prospectus) with SEBI.
- SEBI comments and the response of the company.
- Increased demand from investors as they anticipate the listing.
- Increased valuation and demand from institutions ahead of the listing.
Importantly, filling the DRHP does not guarantee a listing will occur, or occur within a certain timeframe. Individuals tracking the demand for the unlisted shares of NSE, MSEI, NCDEX, etc., in the hopes of future listing activities, should consider those estimations, but do not rely on them strictly.
How Demand and Supply Impact the Prices of Unlisted Shares
In the unlisted market, particularly due to the lack of an order book, demand and supply play a major role in determining the price of unlisted shares.
When it comes to shares of private companies, there are a few rules of thumb for how their prices change.
Limited availability means many private companies have shares that only a small number of private holders own. Block transactions mean that large trades of those shares will likely change the indicative price, which will be used to evaluate the price of shares for trades in the future.
Investor interest means that an increase in interest, even without significant changes, will increase the indicative prices of the shares. Premiums will often be seen as the price of shares is likely to increase if the company is expected to have growth or a public offering.
Conversely, if a company is facing uncertain or poor market sentiment or regulatory issues, then the price of its shares will likely decrease.
Understanding prices for shares with companies such as Polymatech or OYO will often show a lot of variation, even over a short period of time.
Market Behavior Across Different Categories
Behavior in the market can often be inconsistent across categories, and the information below shows some subcategories with their consistent market behavior.
Stock Exchanges: Companies such as those appearing in NCDEX Unlisted Share Counters will generally show sentiment that correlates to greater regulatory and market-structure changes.
Technology Companies: Businesses such as Zepto will often present market behaviors that coincide with recent changes in funding and growth metrics.
Manufacturing: Companies in the manufacturing sector will generally show steady behaviors that correlate to future orders and expansions in manufacturing capacity.
Renewable Energy: Companies such as Onix will show interest that correlates to market policy changes and market capital shifts.
Consumer Internet Businesses: Companies in this market will generally show greater market sentiment and volatility compared to other businesses, and are often reliant on growth narratives.
This is an educational overview that does not provide guidance to trade in any particular company’s shares.
Mistakes in Interpreting Market Behavior
An investor exhibiting inexperience in this area will send some signals. A common set of mistakes includes:
- Accessibility of liquidity.
- considering a single trade price as an evolving market price.
- Price-following, assuming the rumors are accurate.
- Neglecting in-house data.
Considering the narrative and not the financial statement. He/She considers DRHP to be a precursor for an IPO.
Ignoring all but the price movement, he/she considers all trade orders in a vacuum.
Ignoring relative valuation
Considering price levels, without accounting for the size of the company, the maturity, and the growth of the sector.
Some of these mistakes can be avoided by regarding the price levels as one of the inputs.
Understanding Market Behavior
Some of the things that signal that a more methodical approach is required are:
- Reading the financial statements and the annual reports.
- Understanding the dynamics of the company’s sector.
- Taking note of all of the filings relating to an IPO, the DRHP, and the UDRHP documents published by SEBI.
- Taking note of trade frequency in relation to demand and supply.
- Understanding valuation in the context of the company and the sector, where feasible.
- Keeping abreast of news and events that relate to the company’s prospects.
For a more holistic view as it pertains to more than one company, see our analysis of leading unlisted share companies.
Conclusion
Unlisted market behaviour is different from listed markets. Deals are usually made through negotiations. It has less liquidity. The information in the unlisted market is more opaque than that in the listed market.
Price movement is influenced by the fundamentals of the company, the relevant sector, expectations for an IPO, and demand and supply, rather than the kind of trading that occurs in the listed market.
Learning how unlisted markets behave will help you understand how to interpret price movements. Before making any assumptions about the quoted price, consider the overall picture.
How has the financial performance been? How is the company valued? And how liquid is the quoted price?
FAQs
What is unlisted market behaviour?
Unlisted market behaviour is the patterns in price movements and market dynamics in the unlisted or private share market. These shares do not trade on an exchange. Price movements in the unlisted market are formed through negotiated deals, as opposed to continuous order or price matching.
Unlisted market behaviour is the fundamentals of the company, the relevant sector, expectations for an IPO, and demand-supply imbalance in the unlisted market.
What makes unlisted share prices vary?
There are a variety of reasons share prices vary, such as demand/supply, financial performance, and market sentiment with regard to a potential IPO. Trading volume is less in unlisted shares compared to listed shares; thus, a single trade may have a large impact on the indicative price.
Regular changes, such as raising capital or making regulatory announcements, lead to increased price sensitivity, which is not typically the case for listed shares.
What determines value in the unlisted share market?
Valuing a business in the unlisted market can depend on the fundamentals of the business and other external matters, such as changes to the law or the outlook on business sectors.
Recent capital raising is often used as a benchmark for valuing a business. Other factors, such as positive or negative publicity and/or an influx of strategic or institutional investors, can change the business’s valuation. The unlisted market allows greater flexibility, as there are fewer rules regarding share trading or financial disclosures.
What is the impact of liquidity on prices?
Liquidity refers to the ability of an asset to be quickly bought or sold in the market without affecting the asset’s price. Compared to shares traded on an exchange, unlisted shares have lower liquidity.
This lower liquidity impacts the price more drastically; larger sales are more likely to impact the indicative price. Low liquidity also means that prices may not change as often, resulting in a price that may be an outdated representation of current market values.
Does news of an IPO have an impact on unlisted shares?
Yes, news relating to IPOs can include documents filed with the DRHP, observations made by SEBI, or news reports of a potential listing, etc., and can stimulate even more interest among investors in the unlisted shares of a company.
This interest can also result in indicative pricing before an official listing timeline is in place. The act of filing for an IPO or discussions around a public listing should not be seen as a definitive claim, as these do not guarantee a listing will happen as expected.
What factors influence the pricing of unlisted shares?
Unlisted shares are usually sold on a pricing model that is derived from negotiations of sale and purchase agreements. Recent sale and purchase agreements, fundamentals of the company, and recent sentiment or news in the sector are examples of what can be considered.
Because there is no centralized or electronic listing of unlisted shares that automatically matches trades, intermediaries and trading platforms can use recent sale and purchase agreements as the most relevant pricing model and can adjust these prices to current demand and supply of unlisted shares.
Do the unlisted and listed markets have any similarities?
Yes, unlisted markets are significantly different from the listed markets. For example, the unlisted markets do not facilitate real-time, constant trading and price discovery, nor do they have intensive disclosure requirements of listed companies on NSE and BSE, for example.
Because of the nature of how transactions are conducted in unlisted markets, there are fewer frequent transactions and negotiations to arrive at a price. This results in greater reliance on research outside the market to familiarize oneself with the companies and their financials.
What contributes to the higher valuations of certain unlisted shares compared to others?
Typically, higher unlisted share valuations correlate with strong business fundamentals and higher anticipated future growth. For example, listings with strong revenue graphs and with a credible path to grow or to eventually list on the stock exchanges will attract demand and thus push the indicative valuation higher.
On the other hand, weaker growth and business fundamentals usually correlate with lower valuations. Price without context does not equal quality.
What is the impact of demand on unlisted shares?
Demand is the primary driver of unlisted shares’ valuations, especially because of the limited supply of unlisted shares. Unlisted shares demand may increase due to a number of reasons, including market and sector or business momentum.
Price may even increase without a change in valuation fundamentals. Price and valuation fundamentals may decrease when demand decreases. Therefore, unlisted shares market dynamics will most likely follow the demand and supply pattern.
What are some of the ways investors can analyze market dynamics?
There are many ways that investors can study and analyze market dynamics, including reviewing and analyzing financial statements and annual reports, analyzing and understanding market dynamics and the sector, and monitoring and analyzing IPO registrations and filings, including DRHP, to name a few.
Also, reviewing and analyzing dated transactions can show and analyze the demand and supply of the shares, and comparing valuation metrics with peers can provide useful contextual information.
Disclaimer:
This article is for information and educational purposes only. It is not investment advice, a recommendation, or a solicitation to buy or sell any security. Please do your own research and consult a financial advisor before making any investments.
