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Trading shares in the secondary markets

Janet Babin Aug 25, 2010

Trading shares in the secondary markets

Janet Babin Aug 25, 2010


Bill Radke: The Financial Times reported today that Facebook shares hit a trading high this month — around $76 a share. The company’s valued at more that $33 billion.

But wait a minute, you might be thinking — as I was — Facebook is still a private company, doesn’t that mean it don’t have any shares to trade? Well, it turns out there are lots of people — investors, early employees — who do own a stake in the social network and many other start-ups. They’re eager to cash in on their shares. But in this weak economy, firms have delayed going public, and so, you get “secondary trading markets” filling the vacuum.

Reporter Janet Babin tells us about the thriving secondary market.

Janet Babin: Before you get too excited about the prospect of buying up shares of Facebook or some other promising startup, before they go public, you should know this: Few are allowed to play in this high stakes sandbox.

Jeremy Smith is with Second Market, a company that matches buyers and sellers of shares in private companies.

Jeremy Smith: Wealthy, sophisticated investors are allowed to buy over second market. The technical term for them is “accredited investors.”

They include venture capital firms, startup company founders and employees who got in on the ground floor. The reason you have to be rich? This is one dicey market. Take Facebook for example: Its shares may be selling for $76 now. But that’s no guarantee they’ll be worth that when or if the company does go public.

Tom Taulli is an adviser to startup tech companies.

Tom Taulli: You could potentially buy these shares at a higher price than they ultimately would fetch in the public markets, and you may have done just as well to buy it in the public markets.

Buyers of these shares are gambling that they’ll make money when the company eventually goes public. For sellers, this market’s a way to keep their companies alive.

Mark Heesen’s with the National Venture Capital Association. He says many entrepreneurs are running out of cash as they wait to get their IPOs off the ground.

Mark Heesen: Certainly it’s gotten better this year, but the 18 months before 2010 have been abysmal. Even the companies that have gone public this year, while we’ve seen companies go public they haven’t done terribly well, after they’ve gone out.

He says until the economy and the IPO market improves, we can expect to see a lot more trading in these private shares — at least among the wealthy, sophisticated set.

I’m Janet Babin for Marketplace.

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