Shadow Market

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

    A small line found on a candle in a candlestick chart that is ...
  2. Accredited Investor

    A term used by the Securities and Exchange Commission (SEC) under ...
  3. Public Company

    A company that has issued securities through an initial public ...
  4. 3C7

    A portion of the Investment Company Act of 1940 that permits ...
  5. Offering

    The issue or sale of a security by a company. It is often used ...
  6. Shadow Rating

    1. The name given to a bond rating performed on an issuing party ...
Related Articles
  1. Investing

    Countries With The Largest Shadow Markets

    These nations have the largest informal economies relative to their respective GDPs.
  2. Markets

    The Rise And Fall Of The Shadow Banking System

    We look at the evolution, failure and fallout from the shadow banking system.
  3. Financial Advisor

    How to Become an Accredited Investor

    We offer a breakdown of how one qualifies to be an accredited investor and the best way to determine if you net worth is more than $1 million.
  4. Investing

    Why Are Companies Taking Longer To Go Public?

    Learn why private companies are waiting longer to have their IPOs. Understand why it may be more advantageous for a company to stay private.
  5. Markets

    Do You Have What it Takes to Be an Accredited Investor If the Rules Loosen?

    The definition of accredited investor may expand if the Senate backs the House and approves the Fair Investment Opportunities for Professional Experts Act.
  6. Investing

    Why Companies Stay Private

    Many private companies prefer to stay private and find alternate sources of capital. Find out what firms have to gain by eschewing the windfall from a flashy IPO.
  7. Investing

    The Road To Creating An IPO

    Through an Initial Public Offering, or IPO, a company raises capital by issuing shares of stock, or equity in a public market. Generally, this refers to when a company issues stock for the first ...
  8. Investing

    The Ups And Downs Of Initial Public Offerings

    Initial public offerings aren't the best option for every company. Consider these factors before "going public."
  9. Investing

    Reverse Mergers: The Pros And Cons

    Reverse mergers can provide excellent opportunities for companies and investors, but there are still some downsides and risks.
  10. Managing Wealth

    The Pros And Cons Of A Company Going Public

    Small companies looking for growth often use an initial public offering to raise capital. But going public brings both advantages and disadvantages.
RELATED FAQS
  1. What are the different types of IPO issued?

    Learn about the two ways for a company to go public: fixed price and book building. Under fixed price, the share price is ... Read Answer >>
  2. What's the difference between publicly- and privately-held companies?

    Privately-held companies are - no surprise here - privately held. This means that, in most cases, the company is owned by ... Read Answer >>
  3. How does privatization affect a company's shareholders?

    The most recognized transition between the private and public markets is an initial public offering (IPO). Through an IPO, ... Read Answer >>
  4. What are the advantages and disadvantages for a company going public?

    An initial public offering (IPO) is the first sale of stock by a company. Small companies looking to further the growth of ... Read Answer >>
  5. What do you call a candlestick with no shadows, and what does it mean?

    A candlestick with no shadow is regarded as a strong signal of conviction by either buyers or sellers depending on whether ... Read Answer >>
  6. What does 'going public' mean?

    Going public refers to a private company's initial public offering (IPO), thus becoming a publicly traded and owned entity. ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center