The Differences in Investing in Private Companies vs Public Companies

Every company we have talked about on this website has had one thing in common. They are publicly traded companies that anyone can invest in through a public stock exchange. Investing into these companies is a great way to build wealth, but it is not the only way to invest into businesses. One can also invest into companies while they are still privately owned and doing this is easier than ever as there are multiple websites one can use to do so. There is, however, very big differences between investing in public companies and private companies.

1. Liquidity

If one invests into a publicly traded company like, for instance, Apple and they decide the next day that they no longer want to own Apple's stock, they can simply go back to an exchange and sell the share. They can move their money in and out of different stocks as they please. With private companies, it works much differently. There is no exchange. If one buys into a private company, they would have to find someone themselves to buy their ownership stake.

2. The Ability to Make a Return on Investment

Obviously, one can make a return on their investment through both kinds of investments; however, it works differently, and this actually ties back to liquidity. If someone buys a publicly traded companies stock and the company doubles in value, they can sell that stock for double what they paid for it. With a private company, the money they invest is not as easily liquidated, so if a private company doubles in value, it is much more difficult to sell the ownership stake. If one invests into a privately held company, there is three ways that they can make money from it. The first is dividends from the company. Since they own part of the business, some of the companies profits will be distributed to the owners of the business. The second way is if someone buys the company. If someone owns part of a private company that gets bought by another business there ownership stake is bought out from them as well. The third way is if the private company later decides to go public, there ownership stake becomes publicly traded shares that they can sell.

3. Opportunity

One may be reading this and wondering why anyone would invest into private companies instead of publicly traded ones. The answer is the third difference between them: opportunity. Publicly traded companies all have one thing in common. They were all once privately held companies. One of the biggest publicly traded companies in the world is Facebook. Facebook is currently valued at around 930 billion dollars. However, when Facebook was first starting out, they were a private business that Peter Thiel's group was able to buy 5% of at a 5 million dollar valuation. Investing into a privately held business is a lot riskier, but it gives one the ability to make a much larger return on their investment.

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