Most people know it intuitively: when stocks go up, it’s good, and when stocks go up, it’s bad. That’s because the public stock markets are easily the most popular tools for investing, especially for retirement. But that’s not necessarily an indication that they’re the only tool—or even the only good tool. There is an alternative form of stock investing in a private market that can be just as powerful, if not more so. After all, who wouldn’t have loved to have gotten in early on stocks like Google before they went public? With a Self-Directed IRA, investing in these private companies is possible. However, you’ll want to know how it works.
Why Investors Use Private Company Stocks in Self-Directed IRAs
Why private stocks when there are so many public stocks available? There are a multitude of reasons. For one, private stocks might sound like a unique category, but it simply refers to buying stock in a company that hasn’t gone public yet. This can include a wide range of companies, from the earliest seedlings of startups to full-blown companies that are about to have their initial public offering. If you have the chance to invest in a private company stock before most people do, it can represent a powerful opportunity.
But let’s break that down further. What are the reasons most people would want to invest in private company stocks?
For one, there’s the potential for higher returns. The public stock market tends to have high returns over time, which is great for investors with a diversified stock portfolio. But with private stocks, there’s the potential to land yourself in a powerful stock at the perfect time—before its IPO, when future returns can potentially be the highest. Of course, private stocks also come with risks, as do any legitimate investments. Calculating those risks is the name of the game for people seeking returns from private stocks.
Another reason people like Self-Directed IRAs is that they can have the control to make this kind of investment if they so choose. When news came out that Peter Thiel, an investor, had potentially put PayPal stock in a Roth IRA, it meant that there was potentially millions or even billions of dollars of value in tax-protected assets for the investor. Without the flexibility of a Self-Directed IRA, that might not be possible. That’s why so many investors who want to take the reins over their own financial destiny through asset classes like private companies will do so with a Self-Directed IRA.
Finally, there is the possibility of diversification. Some private stocks might get their startups during recessions, when public stocks are down. They might not be as correlated to the overall economy as the public stock market, though every case is different. This diversification across multiple asset classes can add a bit of peace of mind to an investor who wants a portfolio that includes different types of investments.
How to Invest in a Self-Directed IRA for Private Companies
The easy part? Starting a Self-Directed IRA. You can sign up with a Self-Directed IRA administration firm like American IRA, open your Self-Directed IRA account, and start funding it. It’s a simple process of taking on the paperwork. The real challenge will come when you have to do due diligence on the private companies, you’re thinking of investing in. Because American IRA is not a financial adviser, we don’t tell you where to invest the money. You get the flexibility—and the control. And that means the responsibility that comes with picking your own stocks.