Stocks traded on public exchanges, such as the New York or London stock markets, are known as public stocks. Private stocks, on the other hand, change hands in private, unpublished transactions. There are critical differences between public and private stocks, and both carry vastly different risks. Before investing in any of these groups, it is critical to understand these differences.
TL;DR (Too Long; Didn't Read)
Whereas publicly traded stocks are available for purchase on major exchanges such as the New York Stock Exchange, private stocks typically change hands in off-the-record transactions that are subjected to much less scrutiny and regulation.
Defining Private Companies
All companies with shares that aren't traded on a public stock market are considered privately held. To purchase shares in such companies, you must locate the shareholders and make an offer for their stocks. While doing so, you will almost never have the privilege of knowing when the corporation's shares changed hands in the recent past and at what price such transactions occurred.
Private companies are almost always smaller than public corporations. Very few companies grow to the size of a Bank of America, Exxon or Home Depot and still elect to remain private. Therefore, private companies generally have fewer shares outstanding than public corporations, and these shares change hands far less frequently.
Public Corporations and Markets
A public corporation's shares change hands in full view of the world. You can log on to any finance portal, such as Yahoo Finance or Google Finance and see -- free of charge -- at what price a public company's shares changed hands. You can also access the issuing corporation's balance sheet, income statement and a price history going back many decades, in most cases.
This makes it far easier to make an informed decision about the stock and compare it to other investment alternatives. If you make an offer for the stock, which you must do through a registered broker, and are unable to buy the stock, you will also know why you missed the purchase and what someone else paid to acquire the same shares.
Exploring Stock Liquidity
A stock is said to be liquid if there are numerous buyers and sellers available most of the time, making the purchase or sale of its shares relatively easy. Public stocks are far more liquid than private shares. Shares of large public corporations change hands several times a minute.
When attempting to buy privately held shares, on the other hand, you may not be able to find them at any price. Members of the founding family, for example, may refuse to sell the stock. Once you buy a private stock, you may have a hard time finding buyers and get stuck with the shares for a very long time.
Assessing Market Volatility
A volatile stock is one whose share price swings wildly. The shares you bought at $10 a day ago may suddenly trade at $12 or $8 the next day, often with no apparent reason. The larger the pool of buyers and sellers, the less volatile a stock's price tends to be, as some of the many investors watching the stock tend to step in to take advantage of undue low or high prices.
Not surprisingly, the prices of private shares are far more volatile than public stocks. Since fewer investors are willing to commit cash to private companies, their stocks have to drop far lower or advance far beyond what they're worth before investors step in to take advantage. This brings prices back to more normal levels.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.