This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
The "wholesale process" in stock trading is a phrase that covers a few different concepts, and the most common use is the process of buying shares directly from the issuer or from a large institutional seller at a wholesale price. The wholesale price is below the market price, and the wholesale price is available only to qualified investors or to investors who meet a minimum purchase threshold. The strategies that leverage the wholesale process can be useful for traders who qualify, and the strategies carry trade-offs the trader should understand.
What the wholesale process is
The wholesale process in stock trading refers to the direct purchase of shares from the issuer or from a large institutional seller, typically at a discount to the market price. The discount can be 5 percent to 20 percent, and the discount varies by issuer, by size of the purchase, and by the market conditions. The wholesale process is used by qualified investors, by institutional investors, and by some high-net-worth individuals.
The wholesale process is not the same as a private placement. A private placement is a sale of securities to a small number of accredited investors, and the private placement is exempt from the registration requirements of the securities laws. The wholesale process is a broader concept, and the wholesale process can include private placements, block trades, and direct stock purchase plans.
The main strategies
The first strategy is the block trade. The trader buys a large block of shares from an institutional seller, and the block trade is executed at a discount to the market price. The block trade requires a large capital, and the block trade requires a relationship with the seller or with a broker who can intermediate the trade.
The second strategy is the direct stock purchase plan (DSPP). The investor buys shares directly from the issuer, and the DSPP is offered by many public companies. The DSPP allows the investor to buy shares at a discount, and the DSPP allows the investor to reinvest the dividends. The DSPP is a long-term strategy, and the DSPP is not suitable for short-term trading.
The third strategy is the private placement. The investor buys shares from the issuer in a private placement, and the private placement is exempt from the registration requirements. The private placement is available only to accredited investors, and the private placement is subject to a holding period. The holding period can be six months to two years, and the holding period limits the trader's flexibility.
The fourth strategy is the rights offering. The shareholder buys additional shares at a discount to the market price, and the rights offering is offered by the issuer to the existing shareholders. The rights offering is a way to increase the position, and the rights offering is available to all the existing shareholders, not just to qualified investors.
The fifth strategy is the tender offer. The investor sells shares back to the issuer at a premium to the market price, and the tender offer is offered by the issuer to the existing shareholders. The tender offer is a way to exit the position, and the tender offer is available to all the existing shareholders, not just to qualified investors.
The requirements
The first requirement is the capital. The wholesale process requires a significant capital, and the capital ranges from €10,000 for a DSPP to millions of euros for a block trade. The trader should have the capital available, and the trader should be prepared to lock up the capital for a long period.
The second requirement is the accreditation. The private placement requires the investor to be an accredited investor, and the accreditation is based on the income, the net worth, or the professional experience. The trader who does not meet the accreditation cannot participate in the private placement, and the trader should look at other strategies.
The third requirement is the relationship. The block trade requires a relationship with a broker who can intermediate the trade, and the relationship is built over time. The trader who is new to the wholesale process should start with a DSPP or with a rights offering, and the trader can build the relationship over time.
The fourth requirement is the patience. The wholesale process is not a quick trade, and the wholesale process requires patience. The holding period can be long, and the trader should be prepared to hold the shares for months or years.
The practical trade-offs
The first trade-off is the liquidity. The wholesale process reduces the liquidity of the position, and the trader may not be able to sell the shares quickly. The trader who needs liquidity should not use the wholesale process, and the trader should consider the public market instead.
The second trade-off is the discount versus the market price. The wholesale price is below the market price, but the wholesale price is not guaranteed. The market price can fall below the wholesale price, and the trader may end up with a position that is worth less than the purchase price. The trader should compare the wholesale price with the market price, and the trader should not assume the discount is a guaranteed profit.
The third trade-off is the fees. The wholesale process can have higher fees than the public market, and the fee can be a placement fee, a structuring fee, or a custody fee. The trader should calculate the total cost, and the trader should compare the total cost with the cost of buying on the public market.
Common questions about the wholesale process
Who can participate in the wholesale process? The wholesale process is available to qualified investors, institutional investors, and high-net-worth individuals. The accreditation varies by jurisdiction, and the trader should check the local rules.
What is the typical discount? The discount ranges from 5 percent to 20 percent, and the discount varies by issuer, by size, and by the market conditions. The trader should compare the discount with the fees, and the trader should calculate the net discount.
Can I sell the shares immediately after the wholesale purchase? The shares may be subject to a holding period, and the holding period can be six months to two years. The trader should check the holding period, and the trader should be prepared to hold the shares for the required period.
Related resources
Where to start
If you are evaluating the wholesale process, the most useful first step is to identify the strategies that match your capital, your accreditation, and your time horizon. Our broker comparison lists the brokers that offer access to the wholesale process, which together tell you what the broker offers before you place the first wholesale trade.