When a company decides to go public, it conducts an IPO (initial public offering); a transaction which takes place directly between interested investors and the investment bank underwriting it.
That deal takes place on what is known as the primary market.
But, as you will no doubt be familiar, when investors want to liquify their assets they turn to the stock market – the likes of the NYSE or Nasdaq. Here investors – big or small – will buy and sell stock with other investors.
This, as a consequence, is known as secondary trading.
But, increasingly, investors are looking at secondary trading in private equity – in other words, companies which have yet to go public.
Why? Well, as an investor looking for a hoped-for return on investment, it opens up the potential to invest in a company at its early growth stage. To benefit from that increase in value ahead of any public offering.
Thus, private equity secondary trading online marketplaces allow investors to buy and sell shares in private companies, often with the help of a broker.
In addition to expanding the opportunities for investors, these platforms provide liquidity to the owners of private companies, allowing them to sell shares to investors to access necessary funding.
The process of trading on a private equity secondary market platform is similar to that of a traditional stock exchange, but with a few key differences.
One is that transactions conducted through private equity secondary trading platforms are usually completed within a few days, as opposed to the weeks or months required to complete a trade on a public exchange.
In addition, lower fees are charged than traditional exchanges.
Essential to a greater understanding of secondary trading platforms is getting a grasp of three key elements.
Firstly, fair access and transparency help to ensure that all investors have an equal chance to invest in a security or asset, regardless of their individual financial situation.
Transparency of private equity secondary trading platforms is essential for ensuring fair, efficient, and orderly markets. This helps to reduce the potential for market abuse or manipulation.
Fair access to all investors and a highly transparent view of the market also helps to can help to increase the liquidity of those markets, as more cash will be made available if investors and traders have confidence that the market is working efficiently and fairly.
Price discovery is the process of determining the price of any given asset or security. It is an essential process in financial markets, allowing investors and observers to identify the fair price of a given asset.
Price discovery occurs in both primary and secondary markets; in primary markets, the issuer of the asset sets the price of the asset, and investors decide whether to buy or sell it.
In the secondary market, however, price discovery is based on market forces such as supply and demand and popularity. Ultimately, it will come down to a mutually agreeable price for both buyer and seller.
Lastly, having an understanding of the rules and regulations that govern secondary trading platforms is important.
Familiarize yourself with them as they will vary depending on the specific platform and the particular jurisdiction in which the platform is located.
Most platforms will have rules and regulations that govern the types of securities that can be traded, the fees associated with the trades, the trading hours, margin requirements and the procedures for resolving disputes, all of which should be researched thoroughly before committing capital to any investment.
Not to mention the universal rule of all trading which investors must be aware whether big or small: Values can go down, as well as up.
IMPORTANT NOTICE
Investors should recognize and accept the risks associated with investing.
Certain investments may require you to keep your holding for periods of many years with limited or no ability to resell unless there is a strongly regulated secondary market.
You may also have limited access to periodic reporting, see your holdings decrease and increase in value, or even lose your entire investment.
Investors should decide for themselves whether to make any investment, basing this on their own independent evaluation after consulting with financial, tax and investment advisors.