5. Private Placements
Private placements are sales of stock that doesn’t trade on the public markets. To invest in a private placement, you must be an “accredited investor.” This means you must either have a net worth of $1 million, exclusive of residence, or you must have earned $200,000 for each of the past two years with an expectation of the same going forward.
Why Private Placements Are Toxic
There are certain situations where private placements are legitimate investments. However, for the average investor — who can’t possibly get enough information on a private placement to determine its legitimacy — these types of investments are toxic. Much like penny stocks, private placements are often pushed by stock promoters who fraudulently tout the upside of the stock without any information about the worst-case scenario. Private placements can also be hard to sell — at least until after the big shots involved in the placement have already sold their positions at a profit.
