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How To Buy Private Stock



An individual investor you can invest in private companies, but only through side options like an ETF or a mutual fund. An individual investor cannot invest in private companies directly because they are restricted to accredited and institutional investors. If you want help inveting in public or private companies, consider working with a professional financial advisor.




how to buy private stock



The better way to invest in private companies is to invest around them, so to speak. There are several exchange traded funds (ETFs) and mutual funds that give their investors exposure to the private market. They do this in a number of ways. For example, some invest in companies that themselves invest in private companies. Others invest in sectors that tend to track the performance of private companies (for example, by investing in companies that private companies rely on or industries that have a large number of private firms).


This tends to be the best way for individuals to invest around private companies. Funds give you a diversity of assets, which helps to mitigate the risks of this market. At the same time, they have access to the kind of information that private companies may not publish to the market at large, which helps them decide where to invest.


The private market consists of alternative investments such as private equity, private lending, venture capital and private real assets. Private investment opportunities are growing rapidly and private market participants have been very active.


In the public market, companies listed on an exchange sell shares of company ownership in the form of a stock or other security. Companies in the private market, however, are not listed on a public stock exchange. These companies have either been around much longer with proven revenue track records or are startups that need capital for growth, usually provided by private equity firms, venture capital firms, hedge funds or other private market participants.


The private market has been experiencing significant growth. According to "McKinsey's Private Markets Annual Review," published in February 2020, private market assets under management grew $4 trillion, or 170%, within the last decade. Similarly, an increase of private equity firms that invest in existing private companies, or startups, followed.


With tech-enabled, consumer-focused businesses on the rise across industries, there are many global investment opportunities in the private market in a variety of different sectors. Channels of entry into the private market may not be as well-known to retail investors, but they are available. How can investors get skin in the game? Here's what you need to know before investing in the private market:


Investing opportunities in private companies are usually available to investors who fall under the definition of accredited investor. An accredited investor is either a person or an entity qualified under the U.S. Securities and Exchange Commission's Rule 501of Regulation D, which outlines specific criteria for which investors can participate in the private market, such as income and net-worth requirements, professional qualifications and experiences, to name a few.


Investment returns in the private market historically have generated more than that of the public market. Examining the private equity segment of the private market, Cambridge Associates in a June 30 report shows that the US Private Equity Index had a 20-year return of 10.48%, compared with the S&P 500's 5.91% return during the same period. Comparing returns over a shorter time frame, the same report shows the US Private Equity Index's 10-year investment returns to be 13.77% versus the S&P 500's 13.99%.


"In the year 2000, there were 8,000 publicly traded stocks, and today there's around 3,700. That's less than half of the available investment options to invest in publicly in 20 years," says Mitch Reiner, founding partner at Altera Investments, an alternative investment firm in Atlanta.


The decline in the number of public companies can be attributed to fewer regulatory restrictions in the private market compared with the public market, which has SEC reporting requirements. This means private companies are not subject to disclose financial reporting typically seen with public companies. Moreover, given that there are several avenues for financing private companies coming from private equity or private credit funds, there is abundant liquidity in the private marketplace, giving private companies room for growth.


The influx of capital and fundraising dollars along with ongoing private market deals shows how investors see opportunities outside of public equity. Furthermore, investors observe that the value of private companies has been increasing. This motivates investors to get into these investments in the early stages of business development, having the potential to generate substantial returns for investors down the road.


Since there are specific criteria under the accredited investor definition, it's usually the individual investor with a high net worth who can gain greater access to the private markets. Less access to private securities for the everyday investor means missed opportunities to invest in strong private companies that are still growing.


Evaluating a private company is similar to researching a public company; however, the same tools and resources accessible for public companies may not be available for private companies. This is because they are not subject to reporting their business data to the public, a challenge for investors when it comes to assessing business value.


A lack of financial reporting could pose challenges to investors who seek to do thorough research on a company. A private company's management that is not forthcoming with answers to investor questions may pose transparency concerns.


Raelan Lambert, global head of alternatives at Mercer, a global health career, retirement and investments consulting firm headquartered in New York City, says one of the ways to measure the performance of a private fund manager is by a peer-to-peer comparison.


Another risk the private market has is its lack of liquidity. Unlike the stock market where you can easily buy and sell shares of a stock, private investments are illiquid, meaning they are assets that cannot be easily exchanged or sold for cash without a loss in value. Typically, you need to commit several years to the fund before you achieve your ultimate return.


"As opposed to buying a public stock where 100% of your capital is drawn down at the time of the trade, in private markets, that capital is not drawn down 100% on day one, rather it is called over a four- to six-year period," Lambert explains.


If it's your first time investing in the private market, it can be challenging to invest in private securities. Seeking professional help can be a more favorable option. Experts recommend working with a fiduciary professional who has extensive experience with alternative investments.


"Engaging a trusted group of advisors to gain perspective from that acts as a board of advisors who are available for questions. It's important to look at a private deal and consider it relative to others," Reiner explains.


Investors can also choose publicly traded assets that give access to private markets. One exchange-traded fund that gives access to private equity is the Invesco Global Listed Private Equity ETF (ticker: PSP). PSP has a 10-year return of about 9.3%, with a net expense ratio of 1.58% and a market value of less than $14 per share.


PSP is known for its liquidity and is split between late-stage, midstage and early stage private equity. Other ETFs similar to PSP carry higher-than-normal fees, but these securities offer exposure to the private market, with diversification in multiple companies.


Despite its impressive growth, the private market has been lagging on efforts to improve diversity and inclusion. McKinsey's report explains that women and minorities continue to be underrepresented in private markets.


Momentum in the private market and its appeal of greater returns can be an attractive investment avenue, but for investors who are used to the public markets that are more liquid and have lower risk, the private market is a whole new ball game.


Wondering how to trade private stock? Unlike public stocks, private stocks are traded in private, unpublished transactions. Trading private stocks is different than trading public stocks and different rules apply to each.


Public stocks are those traded on public exchanges, such as the London and New York stock markets. You can check any online finance portal, such as Google Finance or Yahoo finance and see the price at which a public company's shares were exchanged. The whole world can see this information, free of charge.


You can even view the corporation's income statement, balance sheet, and price history, which often dates back several decades. With this information, it's much easier to make an informed decision and compare the stock to other investment options.


Making an offer to purchase the stocks must be done through a registered broker. If your offer is rejected, you'll be able to know why you were unable to complete the purchase and what price another person paid to obtain the same shares. These days, any individual with an online trading account can easily buy and sell publicly traded stocks with the click of a button.


Various platforms exist that can help private stock sellers and buyers connect. The Carta (formerly eShares) platform maintains information about private stocks, including the names of owners and what they own, transaction logs, and a list of sellers and interested buyers. This type of platform can reassure both parties they are conducting a fair exchange.


Any company that does not have publicly listed shares is considered to be privately held. Most privately held companies are smaller than public ones, and it's extremely rare for a privately held company to grow to the size of a company like Exxon or Walmart and not go public. Therefore, private companies tend to have fewer stocks than public companies, and, in general, you won't be able to see how frequently or at what prices shares were exchanged. 041b061a72


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