What is a Publicly Traded Company?
Publicly Traded Companies also known as the publically listed companies refers to all those companies which have their shares listed on any of the stock exchanges which allow the trading of its shares to the common public i.e., anyone can sell or purchase the shares of these companies from the open market.
It is a company that has listed itself on at least one public stock exchange and has issued securities for ownership in the company to public investors. The company makes itself public through a process known as Initial Public OfferingInitial Public OfferingInitial Public Offering (IPO) is when the shares of the private companies are listed for the first time in the stock exchange for public trading and investment. This allows a private company to raise the capital for different purposes., which has to be approved by the Securities and Exchange Regulator of any country.
A certain percentage of the shares are issued to the public, but generally, the controlling stake resides with the majority shareholder. A company going public means the secondary market can determine the value of the entire company through trading between investors.
Examples of Publicly Traded Companies
Shares of such companies are traded in the open market between retail investors and institutional investorsInstitutional InvestorsInstitutional investors are entities that pool money from a variety of investors and individuals to create a large sum that is then handed to investment managers who invest it in a variety of assets, shares, and securities. Banks, NBFCs, mutual funds, pension funds, and hedge funds are all examples.. Generally, privately held companies, due to the requirement of large amounts of capital, opt to become public after fulfilling all regulatory requirements. The examples of public traded companies are Procter and Gamble, Google, Apple, Tesla, etc.
- Publicly traded companies have some distinct advantages than privately held companies, such as the ability to sell future stakes in equity, raising more capital by issuing stocks, more diverse investors, etc. However, being public makes such organizations vulnerable to increased regulatory scrutiny and far less control over the decisions of the company by owners and company founders.
- Additionally, companies have to release annual reportsAnnual ReportsAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements. and other mandatory documents as instructed by the securities regulator, and shareholders also have the right of additional documents.
- Also, shareholders get a vote during certain company decisions such as changing of the corporate structure. Such companies can also opt to become private if the owners buy back all the sharesBuy Back All The SharesShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company. from their shareholders either at a premium or discount based on company performance.
- Publicly traded companies have access to a huge amount of capital since they can issue additional stock and attract new investors. Also, they do not have any major liquidityLiquidityLiquidity shows the ease of converting the assets or the securities of the company into the cash. Liquidity is the ability of the firm to pay off the current liabilities with the current assets it possesses. concerns since it has access to a lot of investors. Privately held companies do not have ready access to capital and can engage in selling shares to venture capital and private equity players when they want to.
- While publicly traded companies have to comply with strict regulatory requirements as mandated by the securities and exchange commission of the country, privately held companies do not have any such mandatory requirements.
- Privately held companies have to report when they reach $10 million in assets and more than 500 shareholders. Publicly traded companies have to file mandatory annual reports, quarterly reports, etc. and additional information must be shared with the company’s shareholders. Valuation of a publicly-traded company is much easier since there is a lot of information available for the company. This is because of the mandatory reporting requirements by the securities regulator.
- They can be valued by DCFDCFDiscounted cash flow analysis is a method of analyzing the present value of a company, investment, or cash flow by adjusting future cash flows to the time value of money. This analysis assesses the present fair value of assets, projects, or companies by taking into account many factors such as inflation, risk, and cost of capital, as well as analyzing the company's future performance., Comparable Company Analysis, and Transaction Method. Although the valuation of privately held firms is done through the above three methods, they are less reliable due to lack of information.
How does a Private Company go Public?
Private organizations go public through a method called Initial Public Offering. They take the help of investment bankers to prepare a prospectus for the same and, if possible, underwrite the issue. The investment bankers also do their due diligence in finding out what would be the best offer priceOffer PriceOffering Price is the price that is decided by an investment banking underwriter when a company plans to go public list shares in the stock exchange for raising capital. This price is based on the future earning potential of the company, however, the price shouldn’t be too high then the shares might not be sold in full and if it is too low then the potential to raise more capital is lost..
- A team is formed for an external IPO which will comprise of various stakeholders such as underwriters from investment banksUnderwriters From Investment BanksThe underwriters take the financial risk of their client in return of a financial fee. Market Makers like financial institution and large banks ensure that there is enough amount of liquidity in the market by ensuring that enough trading volume is there., lawyers, certified accountants, and Securities Regulator experts.
- Proper details and information such as financial performance and expected future results are then compiled in the company prospectus and sent for review to the abovementioned stakeholders.
- The financial performance mentioned in the prospectus is then audited by external auditorsAudited By External AuditorsExternal Audit is defined as the audit of the financial records of the company in which independent auditors perform the task of examining validity of financial records of the company carefully in order to find out if there is any misstatement in the records due to fraud, error or embezzlement and then reporting the same to the stakeholders of the company. to generate an opinion.
- The company then files its prospectus with the Securities and Exchange Commission and provides any mandatory documents that are required by the Commission and sets a date for the offering.
A publicly-traded company is a company that has listed itself on at least one public stock exchange and has issued securities for ownership in the organization to public investors. Being a public company has advantages such as access to huge amounts of capital and increased liquidity while there are certain disadvantages, such as a lot of regulatory scrutinies and adhering to reporting requirements.
Such companies stocks are listed on stock exchanges and can be bought or sold in secondary or over the counter markets. Privately held company shares are traded and owned only by a few private investors. Such companies can also opt to become private if the owners buy back all the shares from their shareholders either at a premium or discount based on company performance.
This has been a guide to what is Publicly Traded Company and its definition. Here we discuss the examples of publicly traded companies along with their advantages and disadvantages. You may learn more about our articles below on accounting –