A publicly-traded company is a company that has permission to offer its registered securities (stock, bonds, etc.) for sale to the general public, typically through a stock exchange, or occasionally a company whose stock is traded over the counter (OTC) via market makers who use non-exchange quotation services.
Securities of a public company
Usually, the securities of a public company are owned by many investors while the shares of a private company are owned by relatively few shareholders. A company with many shareholders is not necessarily a public company. In the United States, in some instances, companies with over 500 shareholders may be required to report under the Securities Exchange Act of 1934; companies that report under the 1934 Act are generally deemed public companies. The first company to issue shares is thought to be the Dutch East India Company in 1601.
Advantages
It is able to raise funds and capital through the sale of its securities. This is the reason why public corporations are so important: prior to their existence, it was very difficult to obtain large amounts of capital for private enterprises.
In addition to being able to easily raise capital, public companies may issue their securities as compensation for those that provide services to the company, such as their directors, officers, and employees.
In comparison, private companies may also issue their securities as compensation for services, but the recipients of those securities often have difficulty selling them on the open market. Securities from a public company typically have an established fair market value at any given time as determined by the price the security is sold for on the stock exchange where the security is traded.
The financial media and city analysts will be able to access additional information about the business.
Disadvantages
Private companies have several advantages over public companies. A private company has no requirement to publicly disclose much, if any financial information; such information could be useful to competitors. For example, public companies in the United States are required by the SEC to submit an annual Form 10-K containing a comprehensive detail of a company's performance. Private companies do not file form 10-Ks; they leak less information to competitors, and they tend to be under less pressure to meet quarterly projections for sales and profits -- and thus may be better placed to make good decisions for the long-run.
Public companies are also required to spend more for certified public accountants and other bureaucratic paperwork required of all public companies under government regulations. For example, the Sarbanes-Oxley Act in the United States does not apply to private companies. The wealth and income of the owners remains relatively unknown by the public.
Stockholders
In the US, the Securities and Exchange Commission requires that firms whose stock is traded publicly report their major stockholders each year.[1] The reports identify all institutional shareholders (primarily, firms owning stock in other companies), all company officials who own shares in their firm, and any individual or institution owning more than 5% of the firm’s stock.[1]
General Trend
The norm is for new companies, which are typically small, to be privately owned. After a number of years, if a company has grown significantly and is profitable, or has promising prospects, there is often an initial public offering which converts the private company into a public company or an acquisition of a company by public company.
Yet, some companies choose to remain private for a long period of time after maturity into a profitable company. Investment banking firm Goldman Sachs and shipping services provider United Parcel Service (UPS) are examples of profitable companies which remained private for many years after maturing into profitable companies.
Privatization
Less common, but not unknown, is for a public company to buy out its shareholders and become private. This is typically done through a leveraged buyout and occurs when the buyers believe the securities have been undervalued by investors. Public companies can also become private by having all of their shares purchased by an individual or small group of investors, or by another company that is private.
In addition, one publicly-owned company may be purchased by one or more publicly-owned company(ies), with the bought-out company either becoming a subsidiary or joint venture of the purchaser(s) or ceasing to exist as a separate entity, its former shareholders receiving either cash, shares in the purchasing company or a combination of both. When the compensation in question is primarily shares then the deal is often considered a merger. Subsidiaries and joint ventures can also be created de novo - this often happens in the financial sector. Subsidiaries and joint ventures of public companies are not generally considered to be private companies (even though they themselves are not publicly traded) and are generally subject to the same reporting requirements as publicly-traded companies. Finally, shares in subsidiaries and joint ventures can be (re)-offered to the public at any time - firms that are sold in this manner are called spin-outs.
Most industrialized jurisdictions have enacted laws and regulations that detail the steps that prospective owners (public or private) must undertake if they wish to take over a publicly-traded corporation. This often entails the would-be buyer(s) making a formal offer for each share of the company to shareholders. Normally some form of supermajority is required for this sort of the offer to be approved, but once it happens then usually all shareholders are compelled to sell at the agreed-upon price and the company either becomes a subsidiary, ceases to exist or becomes private.
Trading and valuation
The shares of a public company are often traded on a stock exchange. The value or "size" of a public company is called its market capitalization, a term which is often shortened to "market cap". This is calculated as the number of shares outstanding (as opposed to authorized but not necessarily issued) times the price per share. For example, a company with two million shares outstanding and a price per share of US$40 would have a market capitalization of US$80 million. However, a company's market capitalization should not be confused with the fair market value of the company as a whole since the price per share are influenced by other factors such as the volume of shares traded.
For example, if all shareholders were to simultaneously try to sell their shares in the open market, this would immediately create downward pressure on the price for which the share is traded unless there were an equal number of buyers willing to purchase the security at the price the sellers demand. So, sellers would have to either reduce their price or choose not to sell. Thus, the number of trades in a given period of time, commonly referred to as the "volume" is important when determining how well a company's market capitalization reflects true fair market value of the company as a whole. The higher the volume, the more the fair market value of the company is likely to be reflected by its market capitalization.
Another example of the impact of volume on the accuracy of market capitalization is when a company has little or no trading activity and the market price is simply the price at which the most recent trade took place, which could be days or weeks ago. This occurs when there are no buyers willing to purchase the securities at the price being offered by the sellers and there are no sellers willing to sell at the price the buyers are willing to pay. While this is rare when the company is traded on a major stock exchange, it is not uncommon when shares are traded over-the-counter (OTC). Since individual buyers and sellers need to incorporate news about the company into their purchasing decisions, a security with an imbalance of buyers or sellers may not feel the full effects of recent news.
See also
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