A public company, which is also known as a public limited company or a publicly traded company is a business outfit that allows the general public to get hold of its equity shares. Traditionally, these shares are sold on the stock exchange to traders, brokers, and investors. Some of the major stock exchanges in the United States of America like the New York Stock Exchange; contain tens and thousands of public traded companies where retail investors can buy and sell stocks. Though usually a lion’s portion of public corporation shares are purchased and sold in the public market, this does not necessarily mean that a single individual shareholder is in a position to control a company. What a shareholder can do is a vote to select the Board of Directors, who are authorized to appoint individuals to carry out the day-to-day operations of a company smoothly and effectively. Besides, the board members also have the power to take various decisions in the financial and managerial operations of a business.
What are the benefits and advantages of a public company?
For investors, there are certain benefits that are offered by a public company for buying stocks. There are as follows.
- Transparency: Before a company decides to go public with an IPO or initial public offering, it is mandatory for it to file different financial statements that offer a true and clear view of the company’s financial position, its business model, cash liquidity, and various other important aspects.
- Reporting: SEC or the US Securities and Exchange Commission has made it mandatory for publicly traded companies to issue a yearly report that should contain all the details related to their finances. Additionally, the report should also offer a clear picture of the corporate structure of the company. It helps the shareholders remain informed about the business activities of the company.
- Diversification of portfolio: A retail investor can create a diverse financial portfolio by investing in multiple public companies, rather than investing all their funds in one single company.
- Capital access: The companies that have gone public raise capital to carry out their business operations and pay salaries to their employees.
A couple of downsides of the public company
Though there is a number of reasons why a company would like to go public, yet, there are a couple of downsides or disadvantages to it. In the following section, you’ll be offered a brief insight into some of them.
- Investor control: For retail investors, they have very little or no control over the business operations of a publicly traded company. Indeed they have the power of casting votes to select board members, however, at the end of the day, it is the board members who have the true control.
- Regulation: From the point of view of the company, going public can cause a lot of complications. A huge amount of investment needs to be made to fulfill the government reporting criteria and other essential formalities.
- Risk: In the modern business economy, when it comes to a publicly traded company, it might get valued at a price that can exceed its actual cash in hand or revenue generated. In the business failed to turn out to be a profitable organization within a given period of time, then it is at a high risk of bankruptcy, and rapidly diminishing its shareholders.
For a company to go public, there are multiple different formalities that need to be fulfilled. Besides, there are certain laid down rules and regulations by the authorities that need to be followed. Indeed, the going public comes with different benefits, however, there are certain downsides to it that cannot be overlooked.