Shadow Market

AAA

DEFINITION of 'Shadow Market'

An unregulated private market in which investors can purchase shares in companies that are not currently publicly traded. Shadow markets in stocks give investors an opportunity to invest in companies prior to their initial public offerings (IPO). However, the SEC requires investors to have a net worth greater than $1 million in order to participate in this nontransparent market. These people are what the SEC refers to as "accredited investors".

BREAKING DOWN 'Shadow Market'

The main benefit of using the shadow market to purchase shares is that the accredited investor can get exposure to certain companies much earlier than most other investors. This greatly increases the potential profit for the investor if the stock goes public and demand from average investors drives the stock price up. Some of the downsides of the shadow market include lack of liquidity, lack of disclosure from the company, and a greater degree of uncertainty and risk.

RELATED TERMS
  1. Shadow Inventory

    A term that refers to real estate properties that are either ...
  2. Pre-IPO Placement

    When a portion of an initial public offering (IPO) is placed ...
  3. High Net Worth Individual - HNWI

    A classification used by the financial services industry to denote ...
  4. Prospectus

    A formal legal document, which is required by and filed with ...
  5. Accredited Investor

    A term used by the Securities and Exchange Commission (SEC) under ...
  6. Dog And Pony Show

    A colloquial term that generally refers to a presentation or ...
Related Articles
  1. Mutual Funds & ETFs

    Top 3 ETFs For Investing in China

    Discover the top three China ETFs. Chinese stocks tend to be quite volatile, presenting opportunities for savvy investors, given the country's high growth rate.
  2. Mutual Funds & ETFs

    Hedge Funds' Higher Returns Come At A Price

    Learn how hedge funds win big gains for investors - and why they sometimes lose.
  3. Mutual Funds & ETFs

    Getting To Know Hedge-Like Mutual Funds

    This type of alternative investment mutual fund gives investors the benefits of a hedge fund, without the need for high net worth. See if this strategy is right for you.
  4. Options & Futures

    Hedge Funds Go Retail

    Find out how average investors are breaking into what was once reserved for the ultra rich.
  5. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  6. Active Trading Fundamentals

    The Companies of Peter Theil's Founders Fund

    Learn about the major public companies that Peter Thiel has invested in and companies that are on the verge of going public at multibillion-dollar valuations.
  7. Investing Basics

    If You Had Invested Right After Amazon's IPO

    Find out how much you would have made if you had invested $1,000 during Amazon's IPO, including how the power of the stock split affects investment growth.
  8. Stock Analysis

    6 Things to Know About Soul Cycle Stock

    Learn about SoulCycle and how it has found success. Understand six aspects of the company everyone should know before considering an investment in SoulCycle.
  9. Stock Analysis

    5 Things to Know About Neiman Marcus Stock

    Learn about Nieman Marcus and how it has become successful. Understand five aspects potential investors should know about the company.
  10. Stock Analysis

    5 Things to Know About Planet Fitness Stock

    Learn about Planet Fitness and how it has achieved success. Understand five aspects of the company that have made it an attractive investment.
RELATED FAQS
  1. What kind of assets can be traded on a secondary market?

    Virtually all types of financial assets and investing instruments are traded on secondary markets, including stocks, bonds, ... Read Full Answer >>
  2. Why would a company decide to utilize H-shares over A-shares in its IPO?

    A company would decide to utilize H shares over A shares in its initial public offering (IPO) if that company believes it ... Read Full Answer >>
  3. How do I place a buy limit order if I want to buy a stock during an initial public ...

    During an initial public offering, or IPO, a trader may place a buy limit order by choosing "Buy" and "Limit" in the order ... Read Full Answer >>
  4. How do corporate actions affect floating stock?

    Corporate actions, defined as a company's actions that affect the amount of outstanding company stock shares, can either ... Read Full Answer >>
  5. What are the advantages and disadvantages of listing on the Nasdaq versus other stock ...

    The primary advantages for a company of listing on the Nasdaq exchange are lower listing fees and lower minimum requirements ... Read Full Answer >>
  6. What securities does the primary market deal with?

    The primary market deals with all newly issued securities. When businesses, governments or other groups want to raise capital ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  2. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  3. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  4. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  5. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  6. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!