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What is a Private Purchase?

Matt Brady
Matt Brady

A private purchase happens when an investor buys stock from a privately-held company or firm. Shares of private companies are not publicly traded, and therefore not easily purchased by anyone but experienced and knowledgeable investors. A private purchase can be more risky than buying public stock for a number of reasons: private stock is generally less liquid; is more difficult to evaluate; and can be issued from smaller companies that have less stability than larger, public companies. For such reasons, investors who buy private stock usually get greater returns for their investment.

Making a private purchase is difficult, if not inaccessible, to all but professional investors and venture capitalists. Venture capitalists look for small, privately-held companies that they believe will be successful. These transactions are not traded over a stock exchange, but done privately, often with the assistance of a broker. Such investments can reap great rewards for investors, who often stand to make a great deal more profit on a successful private purchase than a public one. They also tend to be compensated more greatly for their investment, as private purchases are associated with more risk.

Man climbing a rope
Man climbing a rope

Small companies, conversely, court venture capitalists because they often need investors' money to grow their operations. Many companies want the money that an initial public offering (IPO) would afford them, but they don't have the financial stability to weather the transition from a private to a public company. This puts small, private companies in a bind; they can't access the market money that public companies can, so they have to look for investor money elsewhere. That sets the stage for a private purchase, where private companies and investors hope to scratch each others' backs.

It takes a lot of money to enter into a private purchase, and unless in the right circles, many simply don't have the capability to sniff out deals. On public exchanges, it's easy for anyone to go online and see the latest price fluctuation on a stock and, if they're so inclined, choose to purchase a few shares. Private purchases, however, generally require more than purchasing a few shares; these purchases often require a purchase of something more like a lion's share of stock in a company. For those who think they have the money to throw into a private purchase, but don't have the know-how for setting up such deals, online marketplaces have begun to help link up new investors with private companies looking to sell shares. Such marketplaces, it should be warned, don’t make for cheaper transactions; they simply help broaden the playing field.

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