Introduction to Publicly Traded Companies
A Publicly Traded Company is a business or company that has been listed on at least one stock exchange for the purpose of traders to buy or sell the stock of such a company with ownership and claim to the company’s assets (liabilities) and profits (loss).
Explanation of Publicly Traded Companies
A public company is constituted by the coming together of shareholders that essentially become the owners of the companies while setting up management that controls the business and works for maximizing shareholder wealth.
A public company has many legal obligations to fulfill in order to enjoy the benefits of becoming public. Some of them are enforced by the regulatory bodies in the country while others are self-imposed for stringent control and shareholder-management coordination.
Characteristics of Publicly Traded Companies
- A public company is characterized by its size in terms of market capitalization which is simply the market value of its share times the number of shares outstanding. A corporation with $1 million shares outstanding and $20.00 share price has a market capitalization of $20 million.
- A public company is characterized by its limited liability as opposed to the unlimited liability of private companies or partnerships or sole proprietorship. This broadly means that in case of a lawsuit against the company, no individual shareholder will be held i.e. no individual responsibility.
- A public company is a going concern and has perpetual succession. This means that the board members of the company will be succeeded every time in case dissolution or retirement and the company shall live forever.
How does it Work?
A business is always a private company before it becomes a public company. Take for example a young entrepreneur who started his business of selling computers back in 2010 from California. He ran the business quiet well up till 2014 before bringing in investors who were confident about this business.
Over the next 4 years, the team, including the investors who were involved in decision-making due to their stakeholding, did sell lots of products to expand the business in many other states. The corporation had $20 million in annual revenues and handsome profits. But in 2019, the team decided to float an initial public offering in the market to gain funding for further expansion. In this pursuit, the team hires a banking team that helps the young entrepreneur in the process.
This virtual company has been public for a year now and makes regular shareholder interaction and releases documents related to financial disclosure.
Example of Publicly Traded Companies
Some of the biggest public companies (at some point in time, revenues and market values have changed now) were:
Publicly Traded Companies vs Private Traded Companies
The major points of difference between a public company and a private company is the claim of ownership and listing on markets. A company is called becomes public when it allows investors or traders from among the public to buy or sell its stocks. A private company, on the other hand, does not list its stock on any public stock exchange, and hence cannot be offered for public trading.
It should be made clear, for the purpose of understanding the difference between these two entities, that a private company is similar to a public company on the grounds of financing, funding and investing opportunities. A private company can attract individual or institutional investors in return for ownership in the company. However, the transaction or the deal is not carried out in the public market.
A private company is not answerable to shareholders of any kind, whatsoever. Even if the company has investments of individuals or institutions, there is no such agreement as it is between a public company and its shareholders
Benefits of Publicly Traded Companies
Following are some of the benefits that publicly traded companies have:
- Publicly traded companies have more access to financial markets, thereby making it easier for them to raise funds in either form – equity or debt.
- Public companies have greater recognition in terms of outreach and brand reputation. If a public company performs well enough, it gets noticed quicker and better.
- Public companies, with easier access to equity markets, have the option of a cheaper form of financing in equity. Private companies have to rely mostly on bank loans or venture capitalists.
- As a company list on the stock exchange to become public, there is a natural distribution of risk among owners and investors as more people become shareholders in the company.
- Public companies can deploy models that link growth/profits with employees’ performances by making use of employee stock options. Such models tie performances with share ownership and incentivize employees immensely.
Limitations of Publicly Traded Companies
Following are some of the Limitations that publicly traded companies have:
- Public companies must follow regulatory standards that are mandatory for companies before getting listed on stock exchanges.
- Public companies are necessarily required to publish and release documents periodically as mandated by various standards. Annual and quarterly reports are some such examples
- These companies are also required to undergo regular audits following which public disclosures are made so as to actively engage shareholders.
- One of the biggest challenges to publicly traded companies is the agency problem. This occurs when the objectives of management (that runs a public company) are not aligned with that of the shareholder.
Public companies are answerable to stockholders because the stockholders directly vote on major decisions of the company/business. Every shareholder has proportional representation in voting rights. A public company follows and is mandated by regulations to do so, standards, and prescribed formats of reporting to the shareholder.
Public companies work for maximizing shareholder wealth in turn growing their own business and public trust. Such companies should refrain from principal-agent problems (agency problem). If a company incentivizes its senior management, it may run the risk of managers producing false reports of growth and profits.
This is a guide to Publicly Traded Companies. Here we also discuss the introduction to Publicly Traded Companies along with how does it work and characteristics. You may also have a look at the following articles to learn more –