Here’s How Billionaires Buy Stocks

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Most billionaires don’t invest the way we do. Learn what hedge funds, family offices, and prime brokerages can do for elite investors. [[{“value”:”

Investing in stocks is something anyone can do. And thanks to the availability of free stock trading apps, it’s cheaper than ever for the average investor.

But not everyone invests in stocks the same way, and billionaires and the ultra-wealthy often use different stock-buying avenues than the rest of us. Here are a few unique ways billionaires buy stocks and one all of us have access to.

1. A family office

A family office is a unique wealth management firm that caters to billionaires and the ultra-wealthy. A family office may offer financial planning, investment management, tax expertise, and charitable giving opportunities.

These offices can be set up for a specific family and handle their finances exclusively, or cater to multiple high-net-worth families. People with a net worth of at least $50 million may choose a multi-family office, while individuals with a net worth of $250 million or more are likely to have their own family office.

With a family office, billionaires let someone else manage many aspects of their wealth, including buying stocks. But even within a family office, a billionaire can direct financial experts to purchase specific company shares.

2. A prime brokerage

A prime brokerage is a group of services offered to ultra-high-net-worth individuals (UHNWI) or hedge funds. These services include cash and securities lending, risk management consulting, custody of assets (holding securities), and making introductions between clients and investors.

A billionaire may use some or all of these services, but for buying stocks, they may use a prime brokerage specifically to borrow securities for short selling (making money from stocks when they go down) or borrowing large amounts of money to buy stocks on margin.

Large financial firms, including Goldman Sachs and Morgan Stanley, offer prime brokerages. The minimum amount a client must have to use a prime broker is $500,000, though it’s not uncommon for clients to have $50 million in assets.

3. Self-directed brokerage account

This option is for billionaires who want to do all of their investing themselves. A self-directed brokerage account is the same kind you or I might use and has the same types of stock investing options, including individual stocks, exchange-traded funds, options trading, mutual funds, bonds, and real estate investment trusts (REITs).

There’s usually no minimum amount of money needed to open a self-directed brokerage account. Some billionaires may use this account because they enjoy researching companies and making stock picks, maintaining investment privacy, managing their own risks, and the low fees that are associated with these accounts.

4. Private placements

Sometimes, private companies sell shares of their company to a select group of investors. These are called private placements, and most of the time, the shares are sold to investment banks or hedge funds.

But UHNWIs, including billionaires, may also be invited to participate in private placements. This allows them to own shares in companies that the average investor can’t yet purchase. There are restrictions typically placed on the shares, including a lock-up period in which the shares aren’t allowed to be sold.

While you don’t necessarily need to be a billionaire to invest in private placements, individuals usually require a minimum net worth of $1 million, or at least $200,000 in earned income. Companies also decide who gets access to buy shares in the private placement, so even if you have the money, you may not be able to purchase the stock.

5. Hedge funds

Billionaires have access to another investment avenue, called hedge funds, that the average person doesn’t. You can invest in a variety of things through a hedge fund, including individual stocks, land, commodity futures, bonds, and currencies.

While hedge fund investing goes far beyond stock investments, the types of equity investing within hedge funds may include traditional buying and selling of stocks, shorting stocks, using algorithms to quickly buy and sell equities based on statistical models (called quantitative hedge funds), or buying stock in bankrupt companies or during company mergers and acquisitions.

Hedge funds are often far riskier than investing in a mutual fund, and they are exclusively for people with at least $200,000 in income or $1 million in net worth. They also charge high fees, including an annual asset management fee equal to 1% to 2% of the amount you’ve invested and a 20% performance fee of the hedge fund’s profit.

Thankfully, you don’t need a lot of money to start investing, and you certainly don’t need to be a billionaire. Many brokerage accounts have no account minimums, no fees for buying and selling stocks, and are designed for beginner investors instead of experts.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.

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