If you are an individual investor, you cannot buy private shares, but you can sell them. In most cases, the easiest option is to sell your shares back to the company that issued them. Otherwise, you can find a broker who will help you find a buyer and conduct this transaction. For help selling shares of a private company or for any other financial consideration, consider working with a financial advisor.
What is private stock?
Private equity, as the name suggests, is the equity offered by a publicly traded company. This means that the company does not list its shares on any public stock exchange like the New York Stock Exchange, and it does not meet SEC regulatory and disclosure requirements for a publicly traded company.
There is nothing illegitimate in that. Every company starts out as a private company, and only a few move on to public trading.
However, since a private company does not meet SEC disclosure requirements, only accredited and institutional investors can freely trade its shares. Individual investors cannot buy shares of a private company. This is to protect the market as a whole. A company that offers its shares to the general public must also publish details of its finances to the general public. This helps individual investors make better decisions.
A private company is not required to disclose its financial information to the public. As a result, he cannot sell shares to that same audience either. It can only sell its shares to investors who have the resources and experience to perform their own due diligence.
Private shares can still be held individually
Although individual investors cannot buy private shares, they can still own private shares.
This can happen in several ways. One of the most common is to use company stock options. Especially among start-ups that can’t meet market salaries, it’s common to offer stock options as part of an employee’s overall compensation package. If you exercise these options before the company goes public, you may end up owning shares of a private company even though you could not have purchased them directly. (In other cases, you may own shares in a publicly traded company that decides to go private, or you may receive private shares as a gift or inheritance.)
Regardless of the circumstances, as long as you acquired the shares legally, it is also perfectly legal for you to own them. In the case of stock options, many people will hold onto their stock until the company goes public. This is usually the most lucrative option for a successful business.
However, you can also sell them. The hardest part is finding a buyer.
How to sell private stocks
Selling private stocks is in theory the same as selling public stocks. You announce that you want to sell shares, find a buyer to get rid of them, and then agree on a price. What makes this different is that the public market has third-party mechanisms that do this work on your behalf.
For a listed stock, the market clearinghouse allows you to sell your stock without having to find a specific buyer. Basically, you give the order to sell shares while someone else gives the order to buy shares of that same stock. Your brokerage contacts the clearing house, which associates your trade with the pending “buy” order it has received. It routes your actions to the buyer and their money to you, allowing the whole process to happen quickly and anonymously. At the same time, the sheer volume of trading makes it easy to identify the price of a stock.
A publicly traded stock has none of these advantages. The market for publicly traded stocks is much smaller, so few third parties (if any) manage the market as a whole. It is also much less liquid, so there is little (if any) reliable price information. Instead, you must directly find a buyer for your shares and agree on a price that you think is fair.
This makes selling private stocks much more difficult. This is also partly the reason why this sector of the market is small. It is easy for large investors to take advantage of less informed individuals when there is no publicly available price information.
If you have private stocks, there are two best ways to sell them:
Return to issuing company
The easiest option will usually be to sell those shares back to the company that issued them to you. In fact, especially if you received these shares through a stock option, you will often be required to do so. Many companies restrict trading in their private stocks and often require you to sell shares back to the company itself.
To do this, contact the company directly. For example, speak with your boss or your payroll manager if you are an employee. They can either handle the transaction or put you in touch with the right person. Be careful. If you are required to resell your shares to the company, they may not give you a very good price (since, after all, it’s not like you can resell those shares anywhere else).
Be absolutely sure to speak with the company’s attorney or your own attorney during this process. Most private shares give the company some rights over how those shares are sold. You need to make sure you understand your rights and (especially) your responsibilities in this process. Even if the company does not require you to sell your shares back to the company, they may retain a veto over who you can sell them to.
Also consider trying to sell those shares to someone else within the company. If you can’t resell directly to the company or don’t like their offer, you may be able to get a better price from someone else who works there. Remember that you need to find someone who can act as an accredited investor. It’s going to be a private stock sale and you can’t do that with just anybody.
Through a broker
If you are not selling your shares back to the company, the best option is to contact a stockbroker.
When it comes to selling private stocks, the biggest challenge is finding a buyer. You need to find someone who has both the money to buy your shares for what they are worth and the certification to do so. You don’t want to attempt this on your own. This can create a series of complications given the legal issues that surround a private sale. Also, if you try to sell private stocks yourself, chances are you will lose money.
Using a third-party broker can help resolve these issues. A broker is likely to have the expertise to help you accurately price your stocks. They can also play the role of intermediary. A broker will find a buyer for your private shares and can ensure that this transaction meets both the legal requirements for a sale of private shares and any requirements set by the issuing company.
Many brokers won’t do this job, so you may need to look for one that will. Your best option is to start with larger companies, as they will be better equipped to handle a sophisticated transaction. But don’t be surprised if you have to make several calls before you find someone who can take that deal. (Also don’t be surprised if they expect a fairly high commission for completing this transaction.)
Finally, private equity sales can take time. Unlike public stocks, it is not uncommon for sellers not to find an immediate buyer. Your company may not currently be buying back shares of its own stock, so you may have to wait for what is called a buyback program or liquidity event before you can sell. If you’ve approached a broker, don’t be surprised if it takes them a while to find an interested buyer.
Unlike public stocks, the private stock market is quite small and has limited capital. This transaction may simply take time. The best advice we can give you is to accept this and move slowly. The last thing you want is to accept knock-off prices on a valuable asset.
Although individuals cannot buy shares in a private company, they can own and sell those shares. If you want to sell, you will usually have to sell back to the company that issued those shares. Otherwise, look for a broker with experience in handling sophisticated transactions.
Here’s another way you end up owning private stocks: by accident. It doesn’t happen often, but public companies can go private. When this happens, you have to decide what to do with your actions.
A financial advisor will help you make the right investment decisions. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
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