Now that you’ve decided to begin your investment journey, the next question is where.
Private and public markets are the 2 sectors that make up the total financial landscape of
investment. Private companies are usually funded by institutional investors, whereas public companies are traded by the general public on the stock market. In the H1 of 2021, private equity investors of India raised $30 billion, with soaring sectors like IT, finance, and healthcare contributing to the majority of investments.
The main theme of 2021 has been the rising interest of private companies in public listings.
Let’s understand these sectors in greater detail.
Private Sector and Startup Investments
Most companies start out their journey in the private market. Think of Google. It was bootstrapped by Larry Page and Sergey Brin in 1998, pulling together $1 million from friends, family, and other seed investors. In 2004, they made their initial public offering (IPO).
Today, its valuation stands at $520 Billion, making it one of the giant companies in the world. So, the private market includes fast growing companies that receive most of their investments from venture capitalists, private equity firms, close loved ones, and high net worth individuals.
Speaking of wealthy individuals, did you know who was one of the first seed investors of Google? Jeff Bezos, the richest person on the planet. He admired Google’s customer-centric focus as its approach. This is what accredited investors of this space do. They invest in ventures through the assessment of the startup’s vision, mission, approach, and market.
In India, private sector companies face minimal guidelines and restrictions from governing bodies like SEBI (Securities and Exchange Board of India), and they do not have to disclose their financial information to the public.
Jeff Bezos $250,000 translated to $280 million at Google’s IPO. Seeing the risk-reward ratio, startup investing is turning out to be a hot investment option for many people. But not everyone has $250K to invest, right?
This is why at Tyke we enable startup investing for as low as ₹5000/- To sum up the private market in a single statement- these are high risk, high reward investment areas offering an alternative investment class to people who want to diversify their portfolio and have an appetite for risk.
The Public Market
“Don’t bother to bid on this shot in the dark IPO.” When the public market listed Google in 2004, this statement of caution was published by the BusinessWeek column at the time of its initial public offering.
Why?
Because nobody knew or trusted the future of search engines. (Now, of course, it’s a different story). But what’s worth considering is this – Google offering its shares to the public is an example of what goes on in the public market.
Here, shares are sold to the general public who then engage in trading them on the stock exchange. The stock exchange is a centralized location where the investors can buy and sell ownership of companies.
They’re a form of mainstream investments open to all kinds of investors, having easy access and credit flow.Market fluctuations and speculations are common with these kinds of investments.
For maintaining accountability to public shareholders, SEBI heavily regulates the public companies, disclosing their performance for everyone to see.
Now that we’re versed with both private and public sectors, it’s time to tackle the all
important question –
Startups vs Stocks – Which is Better?
Both private and public sectors come with their own share of risks. While public markets are plagued with fluctuations, startups have a tremendous failure rate. Here’s the short answer – it depends. It depends on the market, the company’s growth, the investor’s risk appetite, and their portfolio.
The long answer, on the other hand, requires the assessment of certain basic considerations and differences between startups and public markets.
Liquidity
Public market investors are notorious for keeping a vigilant eye on the rise and crash of the markets. Every day, hundreds of investment experts advise people on buying or selling their shares on the basis of the sector’s market performance.
Liquidity is exactly this – the ability to buy, sell, and exchange the listed share.
Startup investments are not liquid in nature, as it’s impossible to exit a private equity deal before a certain time frame. Liquidity of investments is the main distinction between these 2 markets.
Volatility
If you’re feeling discouraged about startup investments, think again.
Private, unlisted companies are not subject to the volatile moods of the market.They’re protected from the macro-level fluctuating market trends. Public markets, on the other hand, consistently face the highs and lows of supply and demand.
In a way, startup investments are passive in nature till the exit is reached.
They offer an alternative asset in diversifying your portfolio.
Dividends
If the startup you invested in, made a profit, chances are that it’ll never reach your pocket. Young companies have a high requirement for self-sufficiency of finances. All the profits made are typically reinvested back into the business. The only capital gained by the investors, then, is through shares.
Public markets, on the other hand, could remunerate the investors annually through dividends.
So, for example, if you have invested in Bajaj Autos, you could be rewarded with a high dividend rate during economic booms.
These dividends can be in the form of either cash or shares, and they’re distributed to the shareholders.
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