How to invest in private and public companies

Investing in companies has never been easier.

With dozens of investing apps, thousands of companies to choose from, a wealth of investment tools and resources, and multiple ways to track your investments, you can get started in a matter of minutes.

But before you YOLO your life savings into the latest meme stock, it’s important to know what, exactly, you are investing in.

In this guide, we’ll walk you through, step-by-step, how to invest in companies the right way, as well as cover multiple ways to invest. You’ll know how to invest in private or public companies, how to evaluate an investment, and what you should consider before you start investing.

Publicly traded vs. private companies

Before you start researching which companies you want to invest in, you need to know the difference between publicly traded and private companies.

Publicly traded companies are, just like they sound, available to the general public. Their stock can be traded on the open market. These companies are also required to report their financial statements to the Securities and Exchange Commission (SEC), which are available for the general public to review. In general, public companies are much easier to invest in, with tradable stocks available at most online brokers, and a quote market price that makes it easy to value the company.
Private companies are owned wholly by the founders or employees of the company, and shares of its stock are not traded on public markets. Investing in private companies requires buying private shares of equity directly from the company, and it may have a high minimum investment. You will need to have access to key personnel within the company (such as the owner, or investor relations team), or have access to equity shares through a crowdfunding platform.

You can invest in both publicly traded companies and private companies, but the latter requires more work (and possibly more money).

How to invest in publicly traded companies

In most cases, public companies offer shares of stock that are traded on public stock exchanges, making it a more liquid, and simpler, way to invest.

Here’s the process of investing in publicly traded companies:

1. Choose how you want to invest

There are multiple ways to learn how to buy stocks and invest in public companies, based on how involved you want to be in the process and your proclivity to do your own research and investing.

Online broker — For DIY investors, the best online brokers offer a simple (and inexpensive) way to invest. You can quickly download a financial app, create an account, and start investing in individual stocks or ETFs with little-to-no fees.
Robo-advisor — Robo-advisors are online investing platforms that automatically invest your funds based on your risk tolerance and investing goals. After answering a few questions, the robo-advisor builds you an investment plan, and automatically invests your funds based on that plan. They also include automatic rebalancing and tax perks, depending on the account.
Financial advisor — For hands-off investors, a financial advisor can help you with your investing goals and help you build a portfolio based on your preferences. Financial advisors typically help you build a diversified portfolio of funds rather than choose single stocks to invest in, so if you prefer this approach, finding a licensed advisor may be for you. Learn how to choose a financial advisor.

2. Research each company you want to invest in

If you are choosing to invest in individual stocks, it’s important to do your research first. This includes reviewing the company financials, which can be found in the quarterly SEC filings (10-K) on the SEC website.

Some important stats to know are:

Company revenue
Net income
Price-to-earnings (P/E) ratio
Earnings-per-share (EPS)

Compare what you find with other companies as a benchmark and find out what is considered “good” in that company’s market sector.

You’ll also want to answer a few questions about how the company operates, including:

How does the company actually make money?
Is the leadership any good?
Does the company have an edge on competitors?
What are the risks to this company’s future success?

Pairing the answers to these questions with your financial research can give you a good idea as to whether the company’s stock is a good investment or not.

3. Figure out how much you want to invest

Once you choose your investing style and asset allocation, you need to look at your personal finances and determine how much you want to invest. If you can invest on a regular basis, this will help you build an investing position over time, taking advantage of dollar-cost averaging.

First, you’ll need to put together a budget to figure out how much money you have left to invest after paying your bills and other monthly expenditures. Then you can allocate those funds toward your investing goals. This may mean a portion goes toward retirement, while another portion goes toward short-term investing goals.

If you can, automating the investing process is advantageous. This helps you commit to investing the same amount on a regular basis and builds your portfolio automatically.

» MORE: Investing vs. saving: Which should you do, when, and how?

4. Track your investments

Once you begin investing, you will want to track your investment performance and portfolio with the best stock tracking apps and websites. There are a few great apps and websites that offer investment tracking services, as well as investment advice.

Empower, known prior as Personal Capital, is a free investment app that helps you track your net worth, including your individual portfolio performance. It also analyzes your investing fees to help you optimize your portfolio.

Another popular option, Mint, has been among the best budgeting app that also tracks your net worth and investment performance over time.

Both of these apps offer simple-to-use tools to help you keep on top of your finances, and track your investments in a well-designed dashboard.

» MORE: Best Mint Alternatives

How to invest in private companies

Investing in private companies is a more involved process and requires investing in the company directly. That means that instead of purchasing stock on a stock exchange, you deal with the private business itself.

Private companies and small businesses each offer unique advantages over public company investments. You get to create a relationship with the business owners, and you have more say in the company’s inner workings. For example, you may have some say in who gets elected to the board of directors for that business, and you may even join the board yourself.

Regardless of whether you decide to invest in a small business or a larger private company, the process of choosing the right company remains the same.

1. Choose how to invest

Investing in private companies can be done in a few different ways:

Crowdfunding — Crowdfunding sites are aimed at raising capital through smaller investments. This is a better approach if you don’t have a lot of capital to commit to a company.
Angel investing — When investing in a startup or brand-new company, you are considered an “angel investor,” as you are providing startup capital to be used for getting the business off the ground. Angel investors are typically close to the founders and have more favorable terms than later investors.
Venture capital — As a venture capitalist, you are committing capital as part of the growth strategy of an existing company. If the company has already established itself, you can buy a stake in the company by committing funds for growth. This is usually a larger investment, and there is an expected buyout or IPO to gain the bulk of the return on investment.

2. Find companies to invest in

There is no shortage of companies you can invest in, no matter how much or how little experience you have in the market. However, finding them takes time and research.

Many platforms across the web offer information about startups as well as small and private companies. Platforms like Equities News, Crunchbase, and Crowdfund Insider have information, and a simple search can show you private companies and potential investment opportunities.

3. Research and meet with the owners (if possible)

When you find a private company that shows growth and sound business practices, make a list of questions to ask the owners. Look at their financial statements, market, corporate governance documents, and other relevant information.

Talking with the owners can also help you verify information that can be more difficult to find, like their financials.

Ask detailed questions when you meet with the owner. Go beyond the fundamentals, and discuss:

Who uses their product and why it’s successful
How their product will change their market
Business mistakes and how they’ve recovered from them
Who else backs them and believes in their potential

4. Research their operating models

You wouldn’t buy a business’s product if it didn’t work. The same concept goes for the company itself. If it doesn’t have a successful operating model or show positive growth, it’s not a worthwhile investment.

A good financial model should show:

Budgeting capability
Debt and equity
Asset acquisitions
Allocation of funds

This model should also show you where the company gets its funds, its market value, and whatever critical resources needed for it to achieve its business goals. The model also indicates whether the company will use your investment wisely.

5. Negotiate your investment terms

When you invest in a private company over a publicly traded one, you have the opportunity to negotiate your investment terms (usually). When you negotiate, you should ask questions about participatory and safeguarding measures such as:

How will the company use my investment?
Will the company pay me dividends or a portion of its profit?
How will the company communicate with its investors?
Will I be able to participate as a board member?
Do I get to vote on company decisions?
Will the company ask for my approval for spending more than a certain amount?
What is your exit strategy?

You should also know whether you want to make a debt investment or an equity investment. While both can turn into lucrative ventures for you, they differ in how you buy and sell them. You’ll also need to adjust your investment strategy based upon which one you want to focus on.

6. Finalize your deal

Once you’ve negotiated your terms with the company, you can close on your investment. At this point, you’ll see more paperwork, even if you’ve already signed a non-disclosure agreement (NDA) and other confidentiality documents before now.

When you purchase a share of a company, you can expect to read and sign the following agreements:

Term Sheet
Stock Purchase Agreement
Disclosure Schedule
Registration Rights Agreement
Voting Agreement
Right of First Refusal and Co-Sale Agreement
Certificate of Incorporation
Legal Opinion
Accredited Investor Certification
Signature Pages

If it seems like a lot, it is. However, these agreements exist to protect both you and the company in which you’re investing. By reviewing and signing them, you can talk with the company’s owner about your terms and learn what your investment means for both of you.

Things to consider when investing in a company

Investing is highly personal and investing in public or private companies comes down to personal preference, investing goals, and amount of money (and time) you wish to invest.

Here are a few things that every investor should consider when looking to invest in a company:

Growth — Is the company growing? Start by looking at the revenue growth year-over-year and examine the net profit as well. You want both to be trending up.
Debt — If a company is growing revenue and profit, but has a lot of debt, this can be risky. Look for a company with a healthy debt-to-equity ratio. Ideally, a company will have a 2:1 debt-to-equity ratio (or lower), meaning at least 33% of its funding is from shareholders.
Competition — Is the company in a highly competitive market? Does it have an advantage that it can keep? It’s important to understand the market and review the competitors in an industry before investing in a company. Ideally, the company has a “moat,” or competitive advantage that it can hang onto for a long time.
Management — Leadership is key, and if the CEO or other key executives are underperforming, the entire company will suffer. Look for a company with highly qualified leaders who have a track record of success.

Summary

While investing apps have made investing in a company as simple as tapping your screen, this doesn’t mean you will automatically become wealthy. In fact, many individual investments lose money compared to the overall market, which is why passive investing is on the rise.

But if you put in the time and research needed to find public and private companies that offer value, you can invest in quality companies that have the potential to outpace the market.

Investing in public companies is easy, and most investing apps give you access to fee-free trading of stocks. Investing in private companies is significantly harder, but the potential returns can be much higher.

Overall, finding good companies to invest in requires time and patience to educate yourself on each company before you commit your money to them.