Millions of people are invested in the stock market, holding stock in public corporations they believe will be successful or index funds, which have holdings in many of these businesses. But what about businesses that haven’t gone public? Is there a way to invest in them?
The short answer is yes, but it’s not straightforward.
Public vs. private companies
Not all corporations are publicly traded; in other words, a corporation can be unavailable on the stock exchange, instead held by a single person or a group of people. On top of that, most other types of businesses (like LLCs and partnerships) are privately held.
Investing in a privately held business is possible, but it’s more complicated since there’s no public platform for you to do your trading. Instead, you’ll need to find a way to invest directly — and potentially reach an equity agreement with the owner.
So why would you want to invest in a private company in the first place?
- Decision-making involvement. If you invest enough into an emerging private company, you could generate an ownership stake of 5%, 10% or more. At some point, depending on the nature of the business, this will make you an active decision maker in the business, and you may have a say in how the business grows. This gives you much more control over your investment than you’d get in a publicly traded company.
Decision-making involvement. If you invest enough into an emerging private company, you could generate an ownership stake of 5 percent, 10 percent, or more. At some point, depending on the nature of the business, this will make you an active decision-maker in the business, and you may have a say in how the business grows. This gives you much more control over your investment than you’d get in a publicly traded company.
- Independence from Wall Street. Private companies aren’t as influenced by the ebb and flow of stock market prices. They won’t have to report their finances as frequently or as fully as a publicly traded company, and they won’t be as subject to a stock market crash. They can also make decisions for their own goals, rather than just to please shareholders.
Independence from Wall Street. Private companies aren’t as influenced by the ebb and flow of stock market prices. They won’t have to report their finances as frequently or as fully as a publicly traded company, and they won’t be as subject to a stock market crash. They can also make decisions for their own goals, rather than just to please shareholders.
- Speculation and opportunity. Because private companies aren’t as open to the public, it’s possible to find rarer and earlier-stage opportunities. By that same token, private companies tend to be riskier, since you might not know as much about them.
Speculation and opportunity. Because private companies aren’t as open to the public, it’s possible to find rarer and earlier-stage opportunities. By that same token, private companies tend to be riskier, since you might not know as much about them.
But private companies aren’t a perfect investment. There are several reasons why publicly traded companies remain so highly regarded by investors:
- Liquidity. Selling shares in a private company is much more difficult than selling shares of a publicly held one. Publicly traded stocks are fairly liquid.
Liquidity. Selling shares in a private company is much more difficult than selling shares of a publicly held one. Publicly traded stocks are fairly liquid.
- Fluctuating prices. The trackable fluctuating prices of stocks provides direct and immediate insight into the value of your investment. If you invest in a private company, you may have to wait for a company valuation to determine the price of your ownership stake.
Fluctuating prices. The trackable fluctuating prices of stocks provides direct and immediate insight into the value of your investment. If you invest in a private company, you may have to wait for a company valuation to determine the price of your ownership stake.
- Public financial statements. Publicly traded companies are required to post financial results on a regular basis. You’ll know pretty much everything about how the company operates if you do some digging. Private companies are allowed to be more opaque.
Public financial statements. Publicly traded companies are required to post financial results on a regular basis. You’ll know pretty much everything about how the company operates if you do some digging. Private companies are allowed to be more opaque.
- Access. You can buy stock in any publicly traded company using a straightforward, easily learnable brokerage platform. To invest in a private company, you’ll need to pull some strings.
Access. You can buy stock in any publicly traded company using a straightforward, easily learnable brokerage platform. To invest in a private company, you’ll need to pull some strings.
So how exactly can you do this?
Angel investing, venture capital and equity crowdfunding
There are a few different approaches you could use to acquire an ownership stake in a private company. Angel investing is the most straightforward; here, you’ll contribute a stake of your personal wealth in a private company in exchange for a specified percentage of ownership in the business. Angel investors are frequently sought by new entrepreneurs.
You could also team up with several people to create or join a venture capital firm, which functions like a business whose job is to invest in other businesses. And though the rules are currently complex, you could also try equity crowdfunding as a way to gain partial ownership in a privately held firm.
You could also get some exposure to private company investment by investing in a VC firm that is publicly traded. However, this is an indirect means of investment, and you’ll be subject to the VC firm’s decisions.
Private company investments do have some advantages over their publicly traded counterparts. However, they can be much more difficult to accomplish. Make sure you do your research and choose investments that are most appropriate for your long-term financial goals.
Read more here:Ă‚
Exploring the Relationship Between the Stock Market and Real Estate PricesÂ
Health Care Stocks Are Big Winners for an Aging PopulationÂ
Pass Your Portfolio Forward: 3 Estate Planning TipsÂ
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
