Understanding Secondary Shares in Equity Markets: A Guide for Investors

Whether you're investing in public stocks or private companies, you’re probably dealing with secondary shares. After all, they are a key component of the overall equity investment landscape. Transactions in secondary shares (aka secondaries) offer a pathway for liquidity, investment access, and price discovery. 

In this article, we’ll discuss secondary shares, how they work across public and private equity markets, and what investors and shareholders need to consider when engaging in secondary transactions

What are Secondary Shares?

Secondary shares are existing shares of a company that are sold by current shareholders rather than issued by the company itself. Unlike primary shares, which are newly created and sold by the company to raise capital, secondary shares are resold in the market allowing the transfer of ownership from one shareholder to a new investor.

These transactions happen in two primary markets:

• Private equity markets (e.g., stocks of startups and late-stage private companies traded through private networks, such as EquityZen’s platform)
• Public equity markets (e.g., stocks of public companies traded on an exchange, like the NYSE or NASDAQ)

Each market has its own dynamics, regulatory framework, and strategic implications.

Secondary Shares in Private Markets 

Why Secondary Shares Matter in Private Equity

Private companies, especially high-growth startups, often delay going public for years. This is largely due to the abundance of private capital available to fuel the growth of these companies. During this time, early investors, founders, and employees may seek liquidity for their private company stock to fund personal financial needs (like buying a home or paying off student loans) or to diversify their portfolios. The secondary market enables them to sell their stock to new investors without waiting for a traditional exit like an IPO or acquisition.

How Private Market Secondaries Work

In private markets, secondary transactions typically occur on specialized platforms like EquityZen, or through brokered deals between accredited investors and shareholders. This stock is not available on public exchanges, and buyers must meet investor qualification criteria.

Typical sellers in these transactions include:

• Early employees with vested stock options
• Founders looking to reduce concentration risk
• Institutional investors who invested in pre-IPO companies

Considerations When Buying or Selling Private Market Secondaries

• Transfer Restrictions: Many private companies impose limitations like Right of First Refusal or board approval for share transfers. Sellers should know any restrictions applicable to their stock options.
• Valuation Uncertainty: Without public financial disclosures, pricing private company shares can be challenging. Secondary valuations are typically tied to the company’s last round of primary funding. However, since primary rounds do not happen frequently this valuation can grow stale. Tools like EquityZen’s Equity Value Calculator for shareholders or Private Market Map can help both buyers and sellers estimate the market value of private company stock.
• Limited Liquidity: Unlike public markets where trades can close quickly, private secondary transactions often take weeks to close, limiting liquidity. This is because each transaction is unique, requires sourcing and validating investors and company approval. While there are avenues for liquidity pre-IPO like Express Deals, most investors should expect to hold their stock until there is an IPO or exit.
• Regulatory Compliance: SEC rules, such as Rule 144, govern how and when restricted, privately held shares can be sold. In many cases, there is a 180-day lock up period from selling even after a company goes public.

Secondary Shares in Public Markets

In the public market, secondary transactions are more frequent and much more liquid. In fact, the vast majority of investing activity in the public equity markets happens via secondary transactions. Similar to in the private markets, existing shareholders sell their shares to new investors. The company doesn’t raise new capital, and the share count remains unchanged. However, unlike in the private markets, shares are publicly traded. This means that secondary transactions can be completed in near real time via an online brokerage account, enabling ongoing liquidity and price discovery.

Why Shareholders and Insiders Sell Via Public Secondary Transactions

• Insiders who were issued shares in the private market may want to cash out a portion of their holdings post-lockup period.
• Venture capital firms or private equity investors may exit part of their stake following a public listing to crystallize gains and return capital to limited partners or fund new investments.
• Individual investors may sell stock to lock in gains, reallocate capital to new investments, or adjust their portfolio composition.

Key Considerations for Investors

• Share Price Pressure: Large blocks of insider shares hitting the market can impact stock price in the short term. Be aware of when any applicable post-IPO lock ups expire which may cause price volatility.
• Broader Market Moves: Public stocks will be more directly impacted by changes in the broader stock market. Investors should be aware of macroeconomic trends that are driving the market when deciding when and what stocks to buy or sell.
  

Comparing Private vs. Public Secondary Shares¹

The Role of Private Market Secondaries in an Investment Portfolio

For Employees, Founders, and Early Investors

Private market secondaries offer an avenue to unlock the value of equity, diversify holdings, or finance life goals without waiting for a liquidity event.

For Investors 

Secondary shares present an opportunity to:

• Gain early access to high-growth private companies in industries like fintech, artificial intelligence and cybersecurity.
• Build a portfolio that spans both public and private equity markets, which can dampen volatility and increase diversification.

Final Thoughts 

Whether you’re participating in a secondary offering on the NYSE or exploring pre-IPO trades through a platform like EquityZen, understanding secondary transactions is essential.  Secondaries are not only the main investment avenue for most equity investors, they’re also a signal of market sentiment and a mechanism for liquidity.

As the private and public markets continue to converge, and as access to pre-IPO investing becomes more democratized, secondary shares will remain a key tool in the evolving equity playbook.

Not all pre-IPO companies will go public or be acquired, and not all IPOs or acquisitions are or will become successful investments. There are inherent risks in preIPO investments, including the risk of loss of the entire investment, illiquidity, and fluctuations in value and returns. Investors must be able to afford the loss of their entire investment.

Footnotes:

1. There are material differences between private and public secondary shares, including investment objectives, costs and expenses, liquidity, safety, and fluctuation of principal or return.

2. There is no guarantee that a buyer will be found to purchase privately held shares.