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Private equity investing involves investing into privately held companies. These are companies that are not traded publicly on the stock market but are held privately. One may be wondering how to invest into a company that does not have shares open to the public, and I will be addressing that later, but first I want to talk about why private companies can be a great investment.
For a long time, most people were actually not allowed to invest into privately held companies. The only people who could were accredited investors. Regular people were barred from participating in the private equity market. It’s important to note that being an accredited investor doesn’t mean that one has a certain certificate or anything like that, it just means that one has a net worth of a million or more dollars or makes 200k a year. This has since changed and now everyone can invest into private equities through crowdfunding sites.
The reason people should consider private equity investing is because private equity investing has the potential to outperform the market. In fact, private equity funds, as a whole, have outperformed the S&P 500 over the last decade. This is why private equity is so attractive to investors as it gives them the ability to make higher returns.
Private equity is, however, much riskier. Private equity is not as liquid which means once one invests into it, it is not easy to get that money back out. Unlike stocks where one can sell the shares whenever they want, there is no exchange for private equity. When one invests into a private business, it is mostly because they think the business will go public later on and trade on the stock market but at a much higher valuation or because they think another company is going to buy the one they invested in.
There are many ways that the average investor can start investing in private equity. This is through platforms like StartEngine, OurCrowd, Republic, etc. While people probably should not put a large percentage of their net worth into private equity if they do not already possess a high net worth, it could be a good idea to make private equity a small part of one’s portfolio.
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