Private vs Public Companies
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Like schools, clubs and dining rooms, add the word ‘private’ before each of these and they’re suddenly more exclusive. Same goes for a company, which is considered private when it’s – yep, you got it - privately-owned by the founders, managers or private investors. That’s why the shares of a private company aren’t available to just anyone. In fact, it’s usually an expensive and long process to buy these shares because it involves complicated agreements and boring legal fees. ‘Private’ deals are normally done when the buyer has an interest in being involved in the running of the business or they’re a large investor.
Most companies start off as private. But, when a company is large enough the shareholders may choose to invite the public to invest in their company. This makes it possible for anyone in the world (well, almost) to buy some of the shares.
Why would they want do that?
To make money. The more people are interested in buying a company’s shares the more money the company can raise to invest in growing the business.
How do they do it?
You may have heard of the London Stock Exchange (LSE) or the New York Stock Exchange (NYSE). There are many stock exchanges around the world and most countries have at least one. Shares of different companies are bought and sold on these exchanges. Previously, exchanges were a room full of men shouting at each other (Wolf of Wall Street anyone?). These days, everything is done online. For a company to become public it has to apply to a stock exchange and if accepted its shares will be listed on that exchange.
Talk me through it in real life…
In 2012 Facebook went public by listing on the NASDAQ stock exchange (a big, American, old-school exchange). At the time, you could scoop up shares at a price of $38 each but today they cost around $132!
Before going public, Facebook was a private company with a limited number of shareholders. Mark Zuckerberg, a co-founder and CEO, was the largest holder. Today it’s owned by millions of shareholders. This allowed Facebook’s founders – the original shareholders - that were around in the days when it was private, to sell some of their shares and in the process make some (ahem, A LOT OF) money. It also meant Facebook as a business could raise cash to invest in growing the company.
So how can I buy shares?
Well, you can’t go directly to the exchange. You need to open a stock broker account because only they have access to stock exchanges. There are plenty online to choose from so to help you narrow them down MOXI has selected the best investment accounts out there.
UK brokers provide access to the largest stock exchanges and ultimately the largest public companies in the world. But if you’re looking for a specific company on a specific exchange you may have to find the right broker.
Private or Public: Which to invest in?
It may sound like we're contradicting ourselves but in some cases it IS possible to invest in a private company. Enter crowdfunding. It’s a new wave of investing that makes it easy to buy shares in private companies. It’s done via online platforms – like Seedrs - which help private companies raise money from many individuals (this is where ‘the crowd’ part of crowdfunding comes in). The upside? Even if you haven’t got Mark Zuckerberg’s cash or a genius business acumen to add to the company’s caché, you can still play Dragon’s Den and buy into up-and-coming companies before they become hugely successful. Well, that's the idea. But these companies come with a risk.
Side note: If you are interested in investing in up-and-coming companies there may be seriously good tax relief up for grabs that comes with it. To help new and small businesses attract investment, the UK government have two schemes – SEIS and EIS – which provide 50% and 30% tax-back. We have a guide for this.
Got it. Tell me about the risk
When you buy shares it’s helpful to know how you can sell them in the future and cash-in on a raise in share price. However, shares of a private company can’t be sold through a stock broker (that’s only for public companies). So, you have to either wait for the company to be sold or for it to ‘go public’. These events normally don’t happen quickly so you could be invested for a very long time until they do. And, if the company doesn’t do well you won’t get any of your money back. End of story. Here’s where a public company ticks all the boxes. If you buy shares in one of them, there’s a marketplace – the exchange – where you can go to sell your shares, or in other words, there’s ‘liquidity’.
Liquidity refers to how easy it is to buy or sell shares of a company. The shares of a public company are more ‘liquid’. They’re easier to buy or sell because there’s a place provided to do that (that’s the exchange). Shares in a private company are 'less liquid' or ‘illiquid’ because while it may be possible to buy shares via crowdfunding platforms it’s not easy to sell them.
Investing in private companies can be a great opportunity to back a project you really believe in and companies that are crowdfunding will most likely benefit from your cash a lot more than a large corporation. However, MOXI tags them as high risk because a lot will fail. If you still decide to go for it you need to invest in many companies with the strategy that one will pay off for all. The good news is that the entrance fee is low so you don’t need much to get into the game. For example, the minimum on Seedrs is £10. One final word: If you can’t afford to throw this money away, then don’t get involved.