We all know that stock market is a platform which facilitates the buying and selling of securities and stocks of listed companies. However, stocks of only those companies which are public and are listed on the exchanges can be traded on the stock exchange.
Companies which are not public are known as private companies. These companies too have stocks, but they are issued privately to employees and investors. Since these stocks are not public, they are neither listed on the exchanges nor can be traded in the stock market. Companies are often limited by the number of shares. These shares are usually held with the directors and can be issued as per the board decisions.
Startups and other companies also use these stocks as compensation for their employees due to limited cashflow. It also helps in developing a sense of belongingness in the employees for the company. When an employee holds the stock of a company, he actually owns a part of the company, as a result, the profits of the company are also shared with them.
Once a public company is listed on the exchange, investors can freely trade in the stocks of the company. However, in case of private stocks, every purchase or sell of stocks should be first approved by the company. Private stocks or companies do not require a SEBI (Securities or Exchange Board of India) registration. All the companies incorporated in India are registered with the Ministry of Corporate Affairs.
Table of Content
Guide to Sell Private Stocks of Unlisted Company
Working or Private Company Stocks
Selling public stocks is very easy. All you need to do is place a trade order with your broker and the exchange will take care of the rest. It will match your selling price with the buying price of buyers. As soon as both the prices match, your order will be executed. But the case with private stocks is very different and is not so easy.
For selling private stocks, the investors or employees can appoint a broker. Selling private stocks means selling a stake in a company which is not listed on the exchanges. Therefore, it can be a tedious task to find out a prospective buyer on your own. Moreover, the company or the board should approve the sale as well.
Getting approval for company for selling private stocks can be a complicated process because most of the companies do not want their stocks to be widely distributed. Also, sometimes employees are forced to sell stocks for raising some funds for sudden expenses.
Selling Private Stocks of Pre-IPO companies
Selling stocks of a private company which is planning to go public with an initial public offering (IPO) is relatively easy. There are various online sites and portals which help sellers of such stocks by connecting them with buyers of pre-IPO shares.
What may appear to be venture capital market to the masses can be a potential Pre-IPO private company stock exchange for potential sellers. Employees and investors can use these markets for selling their stocks.
Selling Non-Pre IPO private stocks
It is comparatively difficult to sell stocks of a private company which has no plans of launching a public offering. Since the information about most of the private companies is confidential, investors usually stay away from investing in them because they have no idea about the company financials and its working. However, the companies also usually don’t allow sale of their stocks to any random outsider.
It is better to get an idea from fellow investors about how they liquidated their stakes. There are various companies which launch buyback programs from time to time, which allows employees and investors to sale their holdings back to the company.
Also, you can get in touch with fellow colleagues and get an idea if anyone is interested in buying the stocks of the company. A security lawyer can help you in finishing off the paperwork for the transfer of securities.
Conclusion
Selling private stocks is governed by the terms and conditions of issuing company. It is important to understand all the terms and conditions before you invest or exit from stocks of any private company. Though these stocks usually follow the rules of SEBI, they are not governed by the regulatory body. If you don’t hold private stocks or want to trade in public stocks, you can opt for research based recommendations from a SEBI registered investment advisor.
Happy Investing!
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