A shadow market is a type of private market in which investors have access to shares of stock that are currently not being offered for public trading. Typically, a market of this type does require that investors who wish to participate meet specific criteria before being allowed to execute an order. Unlike other types of markets, the shadow market is usually unregulated, which means that there are few if any governmental regulations that protect the interests of those who choose to buy and sell in this market.
Participation in a shadow market usually requires an investor to provide proof of having a net worth that is over a minimum amount. This minimum amount is often set by some sort of exchange commission or agency, and tends to constitute the major part of whatever regulation is actually involved with trading in the market. By requiring a minimum net worth, the potential for dealing with investors that are interested in buying or selling larger lots of stocks is greater, which in turn means that investors have the chance to earn greater returns based on the ability to acquire larger volumes of those shares.
One of the more common applications of a shadow market is the offering of shares prior to the launch of an initial public offering (IPO). The idea is to allow investors the chance to get in on the ground floor before the shares are presented to the general public and can be purchased by anyone with enough financial resources to do so. This approach can actually be to the benefit of those investors who purchase shares on the shadow market, since there is the possibility that the demand for those shares will increase significantly after the launch of the IPO. This means that an investor could conceivably purchase a large number of shares on the shadow market, hold them until after the initial public offering occurs, then sell them in a regulated market situation at a considerable profit.
Since a shadow market is unregulated, choosing to participate in this type of market situation does involve taking on a degree of risk. Data that is normally provided in other market situations may or may not be present within a shadow market, leaving investors with the necessity of finding that data from other sources. In addition, companies offering shares may not offer the fuller disclosure that is necessary with other markets. For this reason, the level of risk may be higher when buying and selling shares in a shadow market versus other markets that are regulated in a manner that helps to protect the interests of both investors and issuers.
