Key Differences Every Investor Should Know
There are material differences between public market and private stock investing, including differences in investment objectives, costs, expenses, and suitability.
Private market investments have grown in recent years, staking their claim as a key piece of a diversified portfolio. In 2023 private market assets under management (AUM) reached $13.1 trillion, marking a 12% increase from the previous year. Projections suggest that private market AUM could expand to more than $15 trillion by 2025 and exceed $18 trillion by 2027.
Investors seeking higher returns and diversification beyond traditional public market investments have driven this expansion. Private investments, including private stock, private debt, infrastructure, and real estate, offer opportunities to access unique growth prospects and potentially achieve better risk-adjusted returns.1
Macroeconomic trends are also driving demand for private investments. Namely, there are fewer public companies as companies stay private longer. The number of public companies has dropped by 50% in the last 30 years. Meanwhile, the number of private companies has grown by 43%.
The companies that are staying private are not early stage ventures either. Over 19,000 private companies within the U.S. generate more than $100 million revenue. Comparatively there are fewer than 3,000 public companies of that size. Twenty years ago many of these companies would have already gone public.
As companies remain private for longer, more investors are interested in buying pre-IPO stock. New technology, like artificial intelligence, is coming from fast-growing private companies. Because of this, the demand for private stock investing will continue to increase. Investors are buying pre-IPO stock to invest in the “next big thing”.
So how does buying private company stock differ from buying public company stock? While both strategies aim to drive investment returns, their accessibility, investment timelines and more differ. Here’s a closer look at the key differences.
Interested in browsing the private company investment opportunities available on EquityZen's marketplace?
1. Access: Who Can Invest?
Private Company Stock:These investments are typically limited to accredited investors. This means individuals who meet specific income or net-worth requirements, as defined by the SEC. The SEC has set financial criteria to qualify as an accredited individual investor.
You typically need an annual income greater than $200K individually or $300K jointly in two of the last three years and a reasonable expectation of the same income in the current year, or a net worth above $1 million, excluding the value of your primary home.
Public Company Stock: Open to both accredited and non-accredited investors, making buying shares of public company stock more accessible to the general public.
2. Time to Complete an Investment: How Long Does it Take?
Private Company Stock: The process for buying private company stock typically takes 6–10 weeks. While platforms like EquityZen have helped streamline the process, there are still additional steps that need to take place before a trade can close. This includes getting company approval for each transaction and the completion of the share transfer process. You can learn more about the full investment process on EquityZen’s platform here.
Public Market Secondaries: Investors trade public stock on stock exchanges like the New York Stock Exchange or NASDAQ. Transactions settle almost immediately with a "T + 1" timeline (trade date plus one business day).
3. Investment Horizon: How Long Is Your Money Tied Up?
Private Company Stock: Investors should expect to hold private company stock until the company goes public or gets acquired. Expect a longer 2–7 year investment horizon, as these investments are often illiquid and require patience.
While there may be opportunities to sell a pre-IPO investment prior to a potential IPO (like via EquityZen Express Deals), pre-IPO liquidity is not always available. Because of this, investors expect greater returns as compensation. This idea is called the illiquidity premium. It is priced into the valuations at which many private companies trade.
Public Company Stock: You can buy or sell publicly traded companies whenever you choose, thanks to the liquid nature of public markets. This enables investors to make tactical investment changes based on market moves.
Investors who want quick access to cash often prefer public stocks. Those who can wait longer may look at pre-IPO stocks.
Interested in browsing the private company investment opportunities available on EquityZen's marketplace?
4. Investment Minimums: What's the Entry Point?
Private Company Stock: For both regulatory and operational reasons, pre-IPO stock investments typically require higher investment minimums. EquityZen offers low investment minimums of $10,000 for private company investments. This helps more investors access these investments.
Private stock investments have been open to accredited investors for many years. However, access was often limited to the very wealthy. This was because of complicated processes and high investment minimums.
Platforms like EquityZen use technology to lower investment minimums. This makes these investments available to more accredited investors.
Public Company Stock: No minimums apply. This allows investors to start investing with smaller amounts of capital.
5. Target Returns: What Can You Expect?
Private Company Stock: Investors in private markets aim to earn higher returns than in public markets. Often the goal is to achieve returns that are asymmetrically skewed to the upside. Investors aim to capitalize on the earlier growth that a company experiences before they go public. This can lead to attractive investment opportunities, though there is also a higher risk of investment loss.
Investors expect compensation for illiquidity and the additional risks involved. Private equity investments have outperformed the S&P over 5, 10, 15 and 20-year time periods. The average 10-year return is 17.3%.2
Public Company Stock: Historically, public market investments have offered lower investment returns over the same time period. However, there is typically more liquidity and less risk associated with public stock investing. The 10-year historical return is 11.9%.
Higher returns in private markets can be attractive. However, investing involves trade-offs. These include longer time frames and limited access.
Incorporating private market investments into a diversified portfolio can provide several benefits:
- Enhanced Returns: Private investments have the potential to outperform public markets. They may potentially higher returns due to the illiquidity premium and access to emerging opportunities.
- Diversification: Private assets often have low correlation with public markets, helping to reduce overall portfolio volatility and providing a hedge against market fluctuations.3
- Access to Growth Opportunities: Investing in private companies allows investors to participate in the earlier stages of innovative businesses. This could potentially lead to substantial long-term gains.
Private stock investing offers many benefits. However, it's important to consider risk factors such as liquidity constraints and the need for thorough due diligence. Strategic asset allocation will look different for every investor, aligning their risk tolerance, financial goals, and time horizon.
Choosing Between Private and Public Markets
The choice between private and public stock depends on your financial goals, risk tolerance, and liquidity needs:
- If you’re seeking higher returns, have patience, and qualify as an accredited investor, private stock can offer attractive opportunities. Platforms like EquityZen offer access to investors with investment minimums as low as $10,000.
- If you prefer flexibility, liquidity, and broad accessibility, public markets are likely the better fit.
For many investors, the right choice for their investment strategy involves holding a mix of both public and private stock. Curious about diving deeper? Platforms like EquityZen can help arm investors with the insights needed to make informed private investing decisions. Get started today.
Interested in browsing the private company investment opportunities available on EquityZen's marketplace?
The information provided is for general informational purposes only and should not be considered a recommendation or personal advice. There are inherent risks in private stock investments, including the risk of loss of the entire investment, illiquidity, and fluctuations in value and return. Investors must be able to afford the loss of their entire investment.
Footnotes:
1. Private investment performance will vary from product to product. Past performance is no guarantee of future results.
2. Based on a comparison of the Pitchbook North American Private Equity Index vs. S&P 500, as of December 31,2023. Private investments are typically calculated on a “money weighted” basis considering infusions of capital, whereas broad-based indices used for public investments are usually calculated on a “time-weighted basis”. Indices are not available for direct investments.
3. Diversification does not assure a profit or protect against market loss.
