How to Trade Private Stock: Everything You Need to Know
Wondering how to trade private stock? Unlike public stocks, private stocks are traded in private, unpublished transactions.3 min read
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 Unlike public stocks, private stocks are traded in private, unpublished transactions.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.
Trading Public Stock
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.
Unfortunately, there are a few major disadvantages associated with owning private stock, such as:
- Difficulty assessing the value of private companies. Accurately gauging a private company's value can be extremely challenging, as financial disclosure is not required at the same level as public companies.
- Third-party estimates can vary significantly. Comparing the private company to a similar public company is often the best bet for determining the company's value.
- Selling stocks back to the company is typically the easiest way to sell shares, but it involves authorization from the company and negotiation of a fair price.
- Not only are private stocks difficult to determine their value, but they can also be difficult to sell at a reasonable price.
Trading Private Stock
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.
To buy private stock, you'll need to identify and contact shareholders, and then make an offer for their stock. It's possible that you won't even be able to make a satisfying offer. For example, the company's founders and family members might refuse to sell their shares. In addition, once you do acquire a private stock, you might have a difficult time finding buyers and end up stuck with it for a long time.
Private Stock Exchange Rules and Regulations
Rules and regulations about purchasing and selling stocks are established in the company's constitution and in the federal Companies Act of 1993. The Act allows existing shareholders to maintain preemptive rights over the company's issuance of new shares. This means that any new shares are first offered to existing shareholders (through proportional amounts), in order to maintain the existing shareholder's current distribution and voting rights. The offer to purchase new stock must remain open for a reasonable amount of time. However, companies are free to limit, modify, or negate these statutory preemptive rights as they see fit, so long as the policies are included within the company's constitution.
Private investors may sell their stock to other investors. However, they may typically only sell to what the SEC has determined as “accredited investors,” which are people with a net worth of over $1 million or yearly income of at least $200,000.
Those who sell private stock must carefully adhere to all the complex SEC regulations and complete all necessary paperwork in order to protect themselves from legal risk.
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