Can You Invest in Startups Using a Demat Account?

Introduction

Investing in startups or unlisted shares can be a risky investment. These shares hold a higher risk since there is limited regulation and oversight. Investing in a startup through a Demat account can be done through an IPO. Other than through a Demat account, investors can look into options like direct investment, purchasing pre-IPO shares, acquiring ESOPs, etc to invest in these startups or unlisted shares. 

Why Startups

The startup environment in India has continued to grow at a great pace leading it to become an extremely attractive option for investors to look into. The growing startup culture is a testament to the country’s entrepreneurial drive and our capability to usher in numerous innovations. The startups in India span numerous sectors like technology, healthcare, and even green energy. This is a bigger eye-opener to the country’s adaptability to global trends.

With the booming startup scene in India continuing to grow, it is offering some exceptional opportunities for investors. 

Listed and Unlisted Shares

There is no doubt that anyone with a Demat account can easily buy listed shares on the stock market. However, if you are looking to invest in shares that have not been listed, then there are ways around that as well. As far as a Demat account is concerned, you can only invest in startups through it if the company decides to launch an initial public offering or IPO like Paytm, Zomato, or Nykaa did. 

SEBI monitors all listed shares on the market very closely but the same does not hold true for unlisted shares. Due to this very reason, though such shares have the potential for great growth opportunities, they also have very high risks. Let us take a look at how traders can invest in these unlisted or startup shares.

Buying Unlisted or Startup Shares

If you want to invest in unlisted shares, there are ways around it. Here’s a look at some of these methods. 

1. Direct Investment: 

One of the best ways to invest in unlisted shares is through direct investment. This rules out the role of third parties like venture capital, debt, or private equity firms. One of the most popular methods of direct investment is angel investing.

2. Pre-IPO Firms: 

Traders can invest in pre-IPO firms through the grey market. These shares do not involve any exchanges as they are off the record but at the end of the day, the shares are credited to your open Demat account. 

3. Employee Stock Options (ESOPs): 

There are quite a few companies that offer ESOPs but are not listed. Through this method, you can invest in the company’s shares directly from their employees. This is usually done at a predetermined price after a certain period.

4. Portfolio Management Systems (PMS): 

One of the best ways to invest in unlisted shares is through professionally managed portfolios (PMS), especially if you can afford them. Such portfolios are customized keeping your financial goals in mind. They also help mitigate risks by offering diversification. PMS are professionally managed, and help you get professional insights into the firms you invest in.

Risks of Unlisted Shares

While investing in unlisted shares might sound easy, like any investment, they do come with their fair share of risks as well. 

1. Low Liquidity: 

Since unlisted shares are not traded through any exchange, finding a buyer when you want to sell the shares might prove tricky.

2. Uncertain Outcomes: 

The companies that sell unlisted shares have limited regulations on them, so the chances of them going bankrupt or investors losing their investments add more risk to your capital.

3. Lack of Company Benefits: 

When you invest in unlisted shares of companies, you might not get benefits like dividends.

4. Transparency Concerns: 

With limited regulation and oversight, conducting thorough research on companies can be challenging. This makes the investments less transparent and more prone to risks.

Conclusion

The only way to invest in startups through a Demat account is through an IPO. However, investors and traders can still invest in unlisted companies as they are not traded through any stock exchanges. There are several ways through which investors can do this, but unlisted stocks also come with their risks. This is why it is always better to make an informed decision after weighing all the pros and cons.