An unlisted security of share is a financial instrument which a formal exchange does not trade. The reason is that it does not meet the criteria for listing. Also, trading of unlisted securities happens on the Over-the-Counter (OTC) market and refers to as OTC securities.
Market owners, or traders, promote the purchase and selling of unlisted securities on the OTC exchange. Usually, unlisted shares cannot meet official exchange listing requirements. It is typically issued by smaller or new companies. For instance, market capitalization thresholds or a willingness to pay the listing fees.
In addition, unlisted securities are often less liquid than listed shares, because they are not exchanged on exchange. The track of unlisted stock is on the OTCBB (OTC Bulletin Board) or via pink sheets.
Types of Unlisted Financial Instruments
Common stock is the most familiar type of unlisted security. It also often trades on the NASDAQ. However, stock trading on the top tier of the NASDAQ network system doesn’t classify as OTC. It caused of the NASDAQ is as stock exchange.
Some of the on-stock instruments does not list. For instance, corporate bonds, government securities and other derivative products. Swaps that exchange into the OTC exchange is just another example.
Investors Should Know the Risks
For unlisted shares the usual risks associated for investing are magnified.
Related to the reduction or removal of size and other conditions for firms, some unlisted businesses may be under-capitalized. They have extremely risky business plans. In addition, no more than an idea without a strategy for success.
Other unlisted transactions carry counterparty risk, liquidity concerns, and interconnection risks. It could include reneging on one side of the deal.
Furthermore, as there is no structured exchange or clearing process, it is up to the integrity of the dealers and/or counterparties to fulfill all the transaction obligations, including securities delivery and payment of the necessary money.