How to Buy Privately Held Stocks

by Lee Nichols

Unlike publicly traded companies, private companies do not sell their stock on stock exchanges. An advantage to buying privately held stocks is not being subject to the U.S Securities and Exchange Commission (SEC). However, having to typically purchase large amounts of shares at a price set by the shares' owner can prevent some investors from entering the private stock market.

Research different types of privately held companies seeking investors. Start-up companies can prove risky, but can also provide the best return for your investment because you can typically receive more shares for your initial investment. Established companies occasionally look for investors to finance growth. Although you likely will not see the same return potential as with a start up, it's less of a risk because the company is already growing. Bankrupt companies can be a good investment if the bankruptcy is due more too poor management than a poor product.

Approach the company personally or through a broker with your interest in purchasing shares. As privately held companies set their own stock price, you might find that while it will see shares, the value of them is not worth their asking price.

Analyze company financial reports and investigate private companies to calculate your level of acceptable risk. While the SEC does not hold private companies to the same standard as publicly traded companies on their financial reports, they still produce reports detailing their finances. If you are planning to invest in a privately held company, request to see all of their statements before agreeing to the investment. Read reports on the company, read the company's website and visit the website of the Secretary of State where the company is based. You might want to hire an attorney or financial professional to investigate the company.

Ask the company about the potential for buybacks if you need to sell your stock later. It can be very difficult to find a buyer for stock in a privately held company. If the company is willing to offer a buyback plan, you might lessen the risk. Being able to sell back your stock depends on the company's ability to buy it if you cannot find another buyer.

Read any contracts or documentation carefully before you sign anything. Ask an attorney, accountant or stockbroker to look at all of your information and provide advice or recommendations whenever possible before purchasing the stock.

Tip

  • If the company you work for offers stock purchases, you can typically purchase stock in smaller quantities and sell them back to the company with little difficulty.