Public Company

Published Sep 8, 2024

Definition of a Public Company

A public company, also known as a publicly traded company, is a corporation whose ownership is dispersed among the general public through the free trade of shares on stock exchanges or over-the-counter markets. Shares of a public company are available for purchase by any investor, and these companies are required to disclose detailed information about their financial performance and business operations to regulatory bodies and the public.

Example

Consider Apple Inc., one of the most well-known public companies. Apple went public on December 12, 1980, with an initial public offering (IPO) of its stock. Since then, it has been listed on the NASDAQ stock exchange under the ticker symbol AAPL. Because it is a public company, Apple must regularly submit financial reports to the Securities and Exchange Commission (SEC) and make them available to its shareholders and the public. This transparency allows investors to make informed decisions about buying, selling, or holding its stock. Similarly, other famous examples of public companies include Amazon, Google (Alphabet Inc.), and Microsoft.

Why Public Companies Matter

Public companies play a crucial role in the economy by:

• Providing opportunities for individual and institutional investors to own a part of a business and share in its profits through dividends and capital gains.
• Enabling companies to raise significant amounts of capital from a broad investor base, which can be used to fuel expansion, innovation, and development.
• Offering increased transparency and accountability through regulatory requirements, regular financial disclosures, and corporate governance standards.
• Contributing to the liquidity and dynamism of financial markets, which is essential for economic growth and stability.
• Creating job opportunities and contributing to the overall economic development of a region or country.

Frequently Asked Questions (FAQ)

What are the main differences between a public company and a private company?

• Ownership: Public companies have their shares available for purchase by the general public on stock exchanges, while private companies are owned by a limited number of individuals or investors and do not trade their shares on public markets.
• Regulation: Public companies are subject to stringent regulatory requirements, including regular financial reporting and disclosures mandated by bodies such as the SEC. Private companies have fewer regulatory obligations.
• Capital Raising: Public companies can raise large amounts of capital by issuing new shares to the public, whereas private companies often rely on private investments and venture capital.
• Liquidity: Shares of public companies are more liquid, meaning they can be more easily bought and sold on stock exchanges compared to shares of private companies.

Why do companies decide to go public?

Companies choose to go public for several reasons:

• Access to Capital: Going public provides companies with access to a larger pool of capital from public investors, which can be used for expansion, research and development, debt reduction, and other corporate purposes.
• Enhanced Public Profile: Being publicly traded can increase a company’s visibility and prestige, attracting new customers, business partners, and talent.
• Liquidity for Shareholders: An IPO offers liquidity to existing shareholders, including founders and early investors, enabling them to realize gains from their investments.
• Stock as a Currency: Public companies can use their stock as a form of currency for acquisitions and employee compensation, aligning management and workforce incentives with company performance.
• Improved Transparency and Governance: The regulatory requirements associated with being public can enhance corporate governance and operational transparency, building investor confidence.

What are the disadvantages of being a public company?

Being a public company comes with several challenges:

• Regulatory Compliance: Public companies face significant regulatory burdens, including the cost of compliance with reporting requirements and corporate governance standards.
• Market Pressure: The need to meet quarterly earnings expectations can pressure management to focus on short-term results rather than long-term strategic goals.
• Loss of Control: Public ownership can dilute the control of existing shareholders, potentially leading to conflicts in decision-making and strategic direction.
• Disclosure Requirements: Mandatory disclosures can provide competitors with insights into a company’s strategies, financials, and operational metrics, potentially affecting competitive advantage.
• Investor Activism: Public companies are susceptible to activist investors who may influence or pressure management to make changes in strategy, structure, or operations.

How does the process of going public work?

The process of going public, known as an Initial Public Offering (IPO), involves several key steps:

1. Preparation: The company prepares by strengthening its financial position, improving its governance structure, and ensuring compliance with regulatory requirements.
2. Hiring Advisors: The company hires investment banks, also known as underwriters, legal counsel, and accountants to guide it through the IPO process.
3. Filing with Regulatory Bodies: The company prepares and files a registration statement, such as the S-1 form with the SEC in the United States, providing detailed information about the business, financial performance, and risks.
4. Due Diligence and Roadshow: The underwriters conduct due diligence to assess the company’s financial health. The company then embarks on a roadshow to market its shares to potential investors.
5. Price Setting: Based on investor interest, the underwriters and the company set an initial offer price for the shares.
6. Going Public: The company’s shares are offered to the public on the stock exchange on a specified date, and trading begins.