How to invest in private and public companies

Updated: Mar 6

Investing in public and private companies can be a great way to grow your wealth and achieve your financial goals. However, it's important to understand the differences between the two types of investments and the pros and cons of each before diving in.

The proliferation of easy-to-use investing tools like Robinhood and Stash has made it easier for anyone to invest. In fact, 52% of global assets are managed by individuals like you and I with that figure expected to grow to 61% by 2030.

Public Companies:

A public company is a company that has issued shares of stock that are traded on a stock exchange, such as the NYSE or NASDAQ. Investors can buy and sell shares of these companies on the open market, and they have the opportunity to make money through capital appreciation and dividends. Pros of investing in public companies include:

Liquidity: The shares of public companies are easily bought and sold on stock exchanges, making it easy for investors to access their money if they need to.
Transparency: Public companies are required to disclose financial information to the public, which makes it easier for investors to research and evaluate them before making an investment.
Diversification: Investing in public companies allows investors to diversify their portfolios by buying shares of different companies in different industries.

Private Companies:

A private company is a company that is not traded on a stock exchange, and its shares are not available to the general public. These companies are often owned by a small group of individuals or institutions and are not subject to the same regulatory requirements as public companies. Pros of investing in private companies include:

Potentially higher returns: Private companies are not publicly traded, which means they are not subject to the same level of scrutiny as public companies. This can lead to higher returns for investors who are able to identify promising private companies.
More control: Private companies are often owned by a small group of individuals or institutions, which means investors have the opportunity to have a greater say in the direction of the company.

However, it's important to note that private companies also come with some drawbacks, such as:

Lack of liquidity: Private company shares are not traded on public exchanges, which means they can be difficult to buy and sell. This can make it difficult for investors to access their money if they need to.
Lack of Transparency: Private companies are not required to disclose the same financial information as public companies, making it more difficult to research and evaluate them before making an investment.

When evaluating an investment in a public or private company, it's important to consider factors such as the company's financials, management team, competitive landscape, and growth prospects. You should also consider your risk tolerance, investment horizon, and overall investment goals. Additionally, a good practice when investing in private companies is to seek the advice of professionals, such as a financial advisor, to guide you in the research and evaluation process.

How to invest in publicly traded companies

Investing in public companies can be a great way to grow your wealth and achieve your financial goals. Public companies are companies that have issued shares of stock that are traded on a stock exchange, such as the NYSE or NASDAQ. Investors can buy and sell shares of these companies on the open market, and they have the opportunity to make money through capital appreciation and dividends. Here's a step-by-step guide on how to invest in public companies:

Open a brokerage account: You will need to open a brokerage account in order to buy and sell shares of public companies. There are many different brokerage firms to choose from, and you should research and compare the fees, tools, and services offered by each before making a decision.
Research and Evaluate Companies: Before investing in a public company, you should research and evaluate the company's financials, management team, competitive landscape, and growth prospects. You should look at the company's financial statements, including its income statement, balance sheet, and cash flow statement. Also, you can use financial ratios like P/E (Price to Earnings) to understand the valuation of a company. Researching the company's management team, industry and competitors, and future prospects for growth will also help you make an informed decision.
Diversify your Portfolio: Public companies come in many different shapes and sizes, and it's important to diversify your portfolio by investing in companies in different industries and of different sizes. By diversifying your portfolio, you can spread your risk across multiple investments, which can help reduce the overall risk of your portfolio.
Regularly Review your investments: Once you have invested in public companies, it's important to regularly review your investments and make adjustments as needed. This means keeping an eye on the companies' financials, management team, and industry developments, and making changes to your portfolio as needed to ensure it aligns with your investment goals.
Set Realistic Expectations: Investing in public companies carries risk, and it's important to set realistic expectations for your investments. Understand that short-term volatility is normal, and that it's important to have a long-term perspective when evaluating your investments.

By following these steps, you can increase your chances of success when investing in public companies. However, it's always important to remember that investing carries risk and there are no guarantees. It's important to consult a financial advisor or professional before making any investment decision.

How to invest in private companies

Investing in private companies can be a great way to grow your wealth and achieve your financial goals, but it's important to understand the risks and unique considerations involved. Private companies are not traded on public stock exchanges, and their shares are not available to the general public. These companies are often owned by a small group of individuals or institutions and are not subject to the same regulatory requirements as public companies. Here's a step-by-step guide on how to invest in private companies:

Identify your investment goals: Before investing in private companies, it's important to have a clear understanding of your investment goals and risk tolerance. Investing in private companies can carry a higher level of risk than investing in public companies, so it's important to understand the potential returns and risks involved before making a decision.
Conduct Due Diligence: Investing in private companies typically requires a higher level of research and due diligence than investing in public companies. Due diligence is the process of evaluating a company's financials, management team, and industry developments to make an informed investment decision. Make sure to research on the company's performance, industry outlook, management team experience, market size and competition.
Look for opportunities in your Network: One of the best ways to identify opportunities in private companies is to look within your network. You may find that you have friends, family, or colleagues who are involved with private companies that are seeking funding. Additionally, professional networking events, such as angel investor groups and venture capital firms, can also be a great way to meet people who may be able to connect you with private companies that are looking for investors.
Consider joining a Private Equity or Venture Capital Fund: Private equity and venture capital funds are institutional investors that pool money from multiple investors to invest in private companies. By investing in these types of funds, you can gain exposure to a portfolio of private companies and benefit from the expertise of professional investors who specialize in this type of investment.
Understand the terms of the investment: Investing in private companies often involves complex legal documents and terms. Make sure to understand the terms and conditions of the investment, including the rights and privileges of investors, any restrictions on the transfer of shares, and the potential return on investment.

Investing in private companies can be a great way to grow your wealth and achieve your financial goals, but it's important to understand the risks and unique considerations involved. Be sure to do your research, consult a professional, and invest in the companies that align with your investment goals and risk tolerance.

More about Private Markets

Private markets, which encompass private equity, venture capital, and other types of investments, are becoming increasingly popular among investors who are looking for alternatives to traditional public market investments. In this guide, we will answer some common questions about investing in private companies, including the benefits and risks, the amount of money you need to invest, and how to invest in companies that are about to go public.

Is there a way to invest in private companies?

Yes, there are several ways to invest in private companies. One way is to directly invest in a private company by purchasing shares of the company through a private placement or a direct investment. Another way is to invest in a private equity or venture capital fund that invests in multiple private companies.

Is it better to invest in private or public companies?

There is no one-size-fits-all answer to this question, as the choice between investing in private or public companies depends on your investment goals, risk tolerance, and other factors. Private companies tend to offer higher potential returns but also come with higher risks, as they are typically smaller and less established than public companies. Public companies, on the other hand, tend to offer more stability and liquidity but may have lower growth potential.

How much money do you need to invest in private companies?

The amount of money you need to invest in private companies varies widely, depending on the specific investment opportunity and the investment minimums set by the company or the fund. Some private companies may require minimum investments of several hundred thousand dollars or more, while others may allow smaller investments. Private equity and venture capital funds typically require minimum investments of several hundred thousand dollars or more.

How to invest in private companies about to go public?

Investing in companies that are about to go public, also known as pre-IPO investing, can be a lucrative but risky strategy. One way to invest in pre-IPO companies is to participate in a secondary market for private company shares, such as SharesPost or EquityZen. Another way is to invest in a private equity or venture capital fund that focuses on pre-IPO companies.

What are the risks of investing in a private company?

Investing in private companies comes with several risks, including the risk of losing your entire investment if the company fails. Other risks include lack of liquidity, lack of transparency, and limited information about the company's financial performance. Additionally, private companies are not subject to the same regulatory requirements as public companies, which can make it more difficult to evaluate their financial health and potential risks.

How can normal people invest in private equity?

Until recently, investing in private equity was largely limited to institutional investors and high net worth individuals. However, in recent years, there have been several developments that have made it easier for normal people to invest in private equity. One way is to invest in a private equity fund that is available to individual investors, such as those offered by some online investment platforms. Another way is to invest in a crowdfunding campaign for a private company, although this option comes with higher risks.

Conclusion

In conclusion, investing in private companies can be a lucrative but risky strategy that requires careful evaluation of the investment opportunity and an understanding of the risks involved. Whether you choose to invest directly in a private company, through a fund, or in pre-IPO companies, it is important to do your research and seek professional advice before making any investment decisions. With the right approach, investing in private markets can provide diversification and potentially higher returns than traditional public market investments.

Investing in public and private companies can both be great options for achieving your financial goals, but it's important to understand the pros and cons of each type of investment and evaluate each opportunity carefully before making a decision.