How and why isn’t there much liquidity in private company stocks?

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I heard private companies go public to increase liquidity for a company’s stock. But what’s wrong with the liquidity in private companies?

In: 1

There’s no market to trade the private company’s stock (i.e. someone can’t look up the price on NASDAQ and order through their etrade account), so if you own private company stock and want to sell you have to manually track down a buyer. Unlike public companies that file their financial statements and other info publicly with the SEC, there’s no available information about a private company that your buyer can use to evaluate and set a price, and you likely can’t share any information you have because company records are subject to confidentiality restrictions. The lack of market and information also means there’s no market price for negotiation, so it’s difficult to negotiate with a potential buyer. Finally, the securities laws place restrictions on transfer of stock (holding periods, information requirements, etc.), and to ensure compliance most private companies have shareholder agreements that restrict transfer of stock subject to fairly narrow exceptions.

There’s no mechanism to buy/sell easily… that’s the primary reason for going public. Buying and selling private shares is more like buying/selling a house, where you have to negotiate a value and terms of sale, etc. It takes longer, it’s a one-off transaction where sides require lawyers, due diligence periods, and such which adds to the costs.

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I heard private companies go public to increase liquidity for a company’s stock. But what’s wrong with the liquidity in private companies?

In: 1

There’s no market to trade the private company’s stock (i.e. someone can’t look up the price on NASDAQ and order through their etrade account), so if you own private company stock and want to sell you have to manually track down a buyer. Unlike public companies that file their financial statements and other info publicly with the SEC, there’s no available information about a private company that your buyer can use to evaluate and set a price, and you likely can’t share any information you have because company records are subject to confidentiality restrictions. The lack of market and information also means there’s no market price for negotiation, so it’s difficult to negotiate with a potential buyer. Finally, the securities laws place restrictions on transfer of stock (holding periods, information requirements, etc.), and to ensure compliance most private companies have shareholder agreements that restrict transfer of stock subject to fairly narrow exceptions.

There’s no mechanism to buy/sell easily… that’s the primary reason for going public. Buying and selling private shares is more like buying/selling a house, where you have to negotiate a value and terms of sale, etc. It takes longer, it’s a one-off transaction where sides require lawyers, due diligence periods, and such which adds to the costs.