How to Buy Stock Privately

Publicly traded stock is familiar to most people even if they’ve never owned stock. Shares in a publicly held corporation are traded on stock exchanges and the price is set by the process of buying and selling. However, it’s possible to buy stock in many privately held corporations. There are risks involved as well as advantages. Before you buy stock privately, be sure you understand both the advantages and the risks.

Difficulty: Moderately Challenging

Instructions

Things You'll Need:

• Company annual report or equivalent information

1. Know the types of private stock offerings. There are three general types and they have different rules and functions. Private Placement Memorandum (Regulation D) offerings are typically made when a company wishes to raise capital quickly and inexpensively. The advantage of this type of offering is that it is exempt from the usual SEC regulations. A Limited Partnership Offer (LPO) is used when investors wish to limit liability for a venture and is a common strategy for risk management for projects like real estate development. Most people who buy stock privately do so through a Small Corporate Offering Registration (SCOR). SCOR stock offerings are allowed in over 40 states and allow the firm to remain private but enable sale of stock to any number of investors. This is regarded as a hybrid that bridges the gap between privately held firms and publicly owned corporations.

2. Understand the risks. The stockholders set the price and you need to be sure it is a fair one. You may have to buy large blocks of stock and invest a large amount. Finally, you may not be able to sell the stock when you wish, or at least not quickly.

3. Consider buying stock privately if you are an employee of a firm that gives its people this option. This is the simplest and least risky way to buy stock privately. Most firms include a buyback guarantee and profits are divided among shareholders according to a set formula.

4. Research a firm thoroughly before you purchase its stock privately. Ask for annual reports or equivalent information so you can evaluate the company’s past performance, current profitability and future plans. Take your time doing this. Since the stock is not traded on the open market, the price will be stable and you can afford to wait without fear of losing a bargain.

5. Make sure you take into account your own financial plans when you make your purchase. Although you are buying a stock that is not publicly traded, you can still use investment vehicles like IRAs to your advantage.