Summary of The Stock Market Loophole That Screws the Little Guy

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The Stock Market Loophole That Screws the Little Guy summary
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Not so long ago, private companies used bank loans, self-funding or venture capital to finance their growth before they went public or another firm acquired them. Now, however, a growing number of well-heeled private buyers are scooping up shares in start-ups from insiders in hopes of making a killing when the companies go public. Financial journalist Felix Salmon explores these speculative transactions, which cut off the public from participating in a business’s early growth stages and give a small handful of investors a big head start. getAbstract recommends this enlightening article to investors concerned about inequality of opportunity in the stock market.

In this summary, you will learn

  • How private purchases of common stock from insiders are benefiting a small group of investors but eroding price discovery,
  • Why public market stock transactions are a more egalitarian form of investment, and
  • Why private buyer transactions may not be good for markets.
 

About the Author

Felix Salmon is a financial journalist, blogger and host of the Slate Money podcast.

 

Summary

Public stock markets in the United States strive to treat all investors equally through regulation and enforced transparency. Even investors of modest means can simply buy a stock in the open market, watch its price movements as it trades on an exchange, and make – or lose – as much money on each share as any billionaire can. Investors purchase a stock if they think it will increase in value and sell it if they aren’t keen on its prospects. More recently, well-connected investors have been staking a claim earlier than the vast majority of investors by buying company shares from insiders before the businesses go public. These private buyers pay prices shielded from public view. The lack of transparency in these transactions thwarts price discovery, a major ingredient in an efficient stock market. And instead of investing money for growth, as venture capitalists do, private buyers simply make a speculative bet. If that bet is successful, they can make much more than the average investor in the public market. 


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