Public company

Last updated November 12, 2024

A public company^[a] is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange (listed company), which facilitates the trade of shares, or not (unlisted public company). In some jurisdictions, public companies over a certain size must be listed on an exchange. In most cases, public companies are private enterprises in the private sector, and "public" emphasizes their reporting and trading on the public markets.

Public companies are formed within the legal systems of particular states and so have associations and formal designations, which are distinct and separate in the polity in which they reside. In the United States, for example, a public company is usually a type of corporation though a corporation need not be a public company. In the United Kingdom, it is usually a public limited company (plc). In France, it is a société anonyme (SA). In Germany, it is an Aktiengesellschaft (AG). While the general idea of a public company may be similar, differences are meaningful and are at the core of international law disputes with regard to industry and trade.

Securities

Usually, the securities of a publicly traded company are owned by many investors while the shares of a privately held company are owned by relatively few shareholders. A company with many shareholders is not necessarily a publicly traded company. Conversely, a publicly traded company typically (but not necessarily) has many shareholders. In the United States, companies with over 500 shareholders in some instances are required to report under the Securities Exchange Act of 1934; companies that report under the 1934 Act are generally deemed public companies.^{[ citation needed ]}

Advantages and disadvantages

Advantages

A public company possess some advantages over privately held businesses.

Publicly traded companies are able to raise funds and capital through the sale (in the primary or secondary market) of shares of stock. That is the reason publicly traded corporations are important since prior to their existence, it was very difficult to obtain large amounts of capital for private enterprises, as significant capital could come only from a smaller set of wealthy investors or banks willing to risk typically large investments. The profit on stock is gained in form of dividend or capital gain to the holders.
The financial media, analysts, and the public are able to access additional information about the business, since the business is commonly legally bound, and naturally motivated (so as to secure further capital), to disseminate public information regarding the financial status and future of the company to its many shareholders and the government.
Because many people have a vested interest in the company's success, the company may be more popular or recognizable than a private company.
The initial shareholders of the company are able to share risk by selling shares to the public. Those who hold a 100% share of the would have need to pay all of the business's debt; however, individuals who were to hold a 50% share would need to pay only 50% of the debt. That increases asset liquidity and the company does not need to depend on funding from a bank. For example, the founder of Facebook, Mark Zuckerberg, owned 29.3% of the company's class A shares in 2013,^[1] which gave him enough voting power to control the business and allowed Facebook to raise capital from and to distribute risk to the remaining shareholders. Facebook had been a privately held company prior to its initial public offering in 2012.^[2]
If some shares are given to managers or other employees, potential conflicts of interest between employees and shareholders (an instance of principal–agent problem) will be remitted. As an example, in many tech companies, entry-level software engineers are given stock in the company upon being hired and so they become shareholders. Therefore, the engineers have a vested interest in the company succeeding financially and are incentivized to work harder and more diligently to ensure that success.^{[ citation needed ]}
Public companies have fiduciary duty to their shareholders, in addition to the directors' fiduciary duty to the company itself.

Disadvantages

Many stock exchanges require that publicly traded companies have their accounts regularly audited by outside auditors and then publish the accounts to their shareholders. Besides the cost, that may make useful information available to competitors. Various other annual and quarterly reports are also required by law. In the United States, the Sarbanes–Oxley Act imposes additional requirements. The requirement for audited books is not imposed by the exchange known as OTC Pink.^[3]^[4] The shares may be maliciously held by outside shareholders and the original founders or owners may lose benefits and control. The principal–agent problem, or the agency problem is a key weakness of public companies. The separation of a company's ownership and control is especially prevalent in such countries as the United Kingdom and the United States.^[5]^[6]

Stockholders

In the United States, the Securities and Exchange Commission requires firms whose stock is traded publicly to report their major shareholders each year.^[7] The reports identify all institutional shareholders (primarily firms that own stock in other companies), all company officials who own shares in their firm, and all individuals or institutions owning more than 5% of the firm's stock.^[7]

General trend

For many years, newly-created companies were privately held but held initial public offering to become publicly traded company or to be acquired by another company if they became larger and more profitable or had promising prospects. More infrequently, some companies such as the investment banking firm Goldman Sachs and the logistics services provider United Parcel Service (UPS) chose to remain privately held for a long period of time after maturity into a profitable company.

However, from 1997 to 2012, the number of corporations publicly traded on US stock exchanges dropped 45%.^[8] According to one observer (Gerald F. Davis), "public corporations have become less concentrated, less integrated, less interconnected at the top, shorter lived, less remunerative for average investors, and less prevalent since the turn of the 21st century".^[9] Davis argues that technological changes such as the decline in price and increasing power, quality and flexibility of computer numerical control machines and newer digitally enabled tools such as 3D printing will lead to smaller and more local organization of production.^[9]

Privatization

In corporate privatization, more often called "going private," a group of private investors or another company that is privately held can buy out the shareholders of a public company, taking the company off the public markets. That is typically done through a leveraged buyout and occurs when the buyers believe the securities have been undervalued by investors. In some cases, public companies that are in severe financial distress may also approach a private company or companies to take over ownership and management of the company. One way of doing so would be to make a rights issue designed to enable the new investor to acquire a supermajority. With a supermajority, the company could then be relisted, or privatized.^{[ citation needed ]}

Alternatively, a publicly traded company may be purchased by one or more other publicly traded companies, with the target company becoming either a subsidiary or joint venture of the purchaser(s), or ceasing to exist as a separate entity, its former shareholders receiving compensation in the form of either cash, shares in the purchasing company or a combination of both. When the compensation is primarily shares then the deal is often considered a merger. Subsidiaries and joint ventures can also be created de novo . That often happens in the financial sector. Subsidiaries and joint ventures of publicly traded companies are not generally considered to be privately held 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.^{[ citation needed ]}

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. That often entails the would-be buyer(s) making a formal offer for each share of the company to shareholders.^{[ citation needed ]}

Trading and valuation

The shares of a publicly traded company are often traded on a stock exchange. The value or "size" of a 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 has 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. Low trading volume can cause artificially low prices for securities, due to investors being apprehensive of investing in a company they perceive as possibly lacking liquidity.^{[ citation needed ]}

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.^{[ citation needed ]}

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 effect of recent news.^{[ citation needed ]}

Notes

↑ Also named publicly traded company, publicly held company, publicly listed company or public limited company

Related Research Articles

The Nasdaq Stock Market is an American stock exchange based in New York City. It is the most active stock trading venue in the U.S. by volume, and ranked second on the list of stock exchanges by market capitalization of shares traded, behind the New York Stock Exchange. The exchange platform is owned by Nasdaq, Inc., which also owns the Nasdaq Nordic stock market network and several U.S.-based stock and options exchanges. Although it trades stock of healthcare, financial, media, entertainment, retail, hospitality, and food businesses, it focuses more on technology stocks. The exchange is made up of both American and foreign firms, with China and Israel being the largest foreign sources.

A stock exchange, securities exchange, or bourse is an exchange where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds and other financial instruments. Stock exchanges may also provide facilities for the issue and redemption of such securities and instruments and capital events including the payment of income and dividends. Securities traded on a stock exchange include stock issued by listed companies, unit trusts, derivatives, pooled investment products and bonds. Stock exchanges often function as "continuous auction" markets with buyers and sellers consummating transactions via open outcry at a central location such as the floor of the exchange or by using an electronic system to process financial transactions.

The primary market is the part of the capital market that deals with the issuance and sale of securities to purchasers directly by the issuer, with the issuer being paid the proceeds. A primary market means the market for new issues of securities, as distinguished from the secondary market, where previously issued securities are bought and sold. A market is primary if the proceeds of sales go to the issuer of the securities sold. Buyers buy securities that were not previously traded.

A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any form of financial instrument, even though the underlying legal and regulatory regime may not have such a broad definition. In some jurisdictions the term specifically excludes financial instruments other than equity and fixed income instruments. In some jurisdictions it includes some instruments that are close to equities and fixed income, e.g., equity warrants.

<span class="mw-page-title-main">Stock market</span> Place where stocks are traded

A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks, which represent ownership claims on businesses; these may include securities listed on a public stock exchange as well as stock that is only traded privately, such as shares of private companies that are sold to investors through equity crowdfunding platforms. Investments are usually made with an investment strategy in mind.

A stock split or stock divide increases the number of shares in a company. For example, after a 2-for-1 split, each investor will own double the number of shares, and each share will be worth half as much. A stock split causes a decrease of market price of individual shares, but does not change the total market capitalization of the company: stock dilution does not occur.

Penny stocks are common shares of small public companies that trade for less than one dollar per share. The U.S. Securities and Exchange Commission (SEC) uses the term "Penny stock" to refer to a security, a financial instrument which represents a given financial value, issued by small public companies that trade at less than $5 per share. Penny stocks are priced over-the-counter, rather than on the trading floor. The term "penny stock" refers to shares that, prior to the SEC's classification, traded for "pennies on the dollar". In 1934, when the United States government passed the Securities Exchange Act to regulate any and all transactions of securities between parties which are "not the original issuer", the SEC at the time disclosed that equity securities which trade for less than $5 per share could not be listed on any national stock exchange or index.

The secondary market, also called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. The initial sale of the security by the issuer to a purchaser, who pays proceeds to the issuer, is the primary market. All sales after the initial sale of the security are sales in the secondary market. Whereas the term primary market refers to the market for new issues of securities, and "[a] market is primary if the proceeds of sales go to the issuer of the securities sold," the secondary market in contrast is the market created by the later trading of such securities.

Security market is a component of the wider financial market where securities can be bought and sold between subjects of the economy, on the basis of demand and supply. Security markets encompasses stock markets, bond markets and derivatives markets where prices can be determined and participants both professional and non professional can meet.

A rights issue or rights offer is a dividend of subscription rights to buy additional securities in a company made to the company's existing security holders. When the rights are for equity securities, such as shares, in a public company, it can be a non-dilutive pro rata way to raise capital. Rights issues are typically sold via a prospectus or prospectus supplement. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the issuer at a specified price within a subscription period. In a public company, a rights issue is a form of public offering.

A reverse takeover (RTO), reverse merger, or reverse IPO is the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public. Sometimes, conversely, the public company is bought by the private company through an asset swap and share issue. The transaction typically requires reorganization of capitalization of the acquiring company.

Euronext Amsterdam is a stock exchange based in Amsterdam, the Netherlands. Formerly known as the Amsterdam Stock Exchange, it merged on 22 September 2000 with the Brussels Stock Exchange and the Paris Stock Exchange to form Euronext. The registered office of Euronext, itself incorporated in the Netherlands a public limited company, is also located in the exchange.

Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Here various valuation techniques are used by financial market participants to determine the price they are willing to pay or receive to effect a sale of the business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes such as in shareholders deadlock, divorce litigation and estate contest.

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Jefferies Group LLC is an American multinational independent investment bank and financial services company that is headquartered in New York City. The firm provides clients with capital markets and financial advisory services, institutional brokerage, securities research, and asset management. This includes mergers and acquisitions, restructuring, and other financial advisory services. The Capital Markets segment also includes its securities trading and investment banking activities.

Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information. The setups are generally made to result in monetary gain for the deceivers, and generally result in unfair monetary losses for the investors. They are generally violating securities laws.

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In the context of stock markets, the public float or free float represents the portion of shares of a corporation that are in the hands of public investors as opposed to locked-in shares held by promoters, company officers, controlling-interest investors, or governments. This number is sometimes seen as a better way of calculating market capitalization, because it provides a more accurate reflection of what public investors consider the company to be worth. In this context, the float may refer to all the shares outstanding that can be publicly traded.

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References

↑ Dillet, Romain (February 15, 2013). "Zuckerberg Now Owns 29.3 Percent Of Facebook's Class A Shares And This Stake Is Worth $13.6 billion". TechCrunch. Archived from the original on April 16, 2018. Retrieved April 15, 2018.
↑ "If You Had Invested Right After Facebook's IPO (FB, TWTR)". Investopedia. August 14, 2015. Archived from the original on April 16, 2018. Retrieved April 15, 2018.
↑ Devcic, John (September 21, 2014). "The Over-The-Counter Market: An Introduction To Pink Sheets". Investopedia. Archived from the original on April 7, 2017. Retrieved February 15, 2017.
↑ "Pink: The Open Market". OTC Markets. The Markets. Archived from the original on February 11, 2017. Retrieved February 15, 2017.
↑ Jensen, Michael C.; Meckling, William H. (October 1976). "Theory of the firm: Managerial behavior, agency costs and ownership structure". Journal of Financial Economics. 3 (4): 305–360. doi:10.1016/0304-405X(76)90026-X.
↑ Berle Jr., Adolf Augustus; Means, Gardiner Coit (2017) [1932 by Transaction Publishers]. The Modern Corporation and Private Property. London; New York: Routledge; Taylor & Francis. ISBN 978-0-88738-887-3.^{[ page needed ]}
1 2 "Myth #5. The Federal Reserve is owned and controlled by foreigners". Political Research Associates . Archived from the original on December 3, 2008. Retrieved November 23, 2008.
↑ "Is it time to rethink public corporations?". Minnesota Public Radio News. November 14, 2012. Archived from the original on May 1, 2013. Retrieved February 15, 2017.
1 2 Davis, Gerald F. (April 24, 2012). "Re-imagining the corporation" (PDF). Ross School of Business, University of Michigan. Archived (PDF) from the original on April 5, 2016. Retrieved February 15, 2017.

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[1] Also named publicly traded company, publicly held company, publicly listed company or public limited company

[:0-2] Dillet, Romain (February 15, 2013). "Zuckerberg Now Owns 29.3 Percent Of Facebook's Class A Shares And This Stake Is Worth $13.6 billion". TechCrunch. Archived from the original on April 16, 2018. Retrieved April 15, 2018.

[3] "If You Had Invested Right After Facebook's IPO (FB, TWTR)". Investopedia. August 14, 2015. Archived from the original on April 16, 2018. Retrieved April 15, 2018.

[4] Devcic, John (September 21, 2014). "The Over-The-Counter Market: An Introduction To Pink Sheets". Investopedia. Archived from the original on April 7, 2017. Retrieved February 15, 2017.

[5] "Pink: The Open Market". OTC Markets. The Markets. Archived from the original on February 11, 2017. Retrieved February 15, 2017.

[6] Jensen, Michael C.; Meckling, William H. (October 1976). "Theory of the firm: Managerial behavior, agency costs and ownership structure". Journal of Financial Economics. 3 (4): 305–360. doi:10.1016/0304-405X(76)90026-X.

[7] Berle Jr., Adolf Augustus; Means, Gardiner Coit (2017) [1932 by Transaction Publishers]. The Modern Corporation and Private Property. London; New York: Routledge; Taylor & Francis. ISBN 978-0-88738-887-3.^{[ page needed ]}

[R000323-8] 1 2 "Myth #5. The Federal Reserve is owned and controlled by foreigners". Political Research Associates . Archived from the original on December 3, 2008. Retrieved November 23, 2008.

[9] "Is it time to rethink public corporations?". Minnesota Public Radio News. November 14, 2012. Archived from the original on May 1, 2013. Retrieved February 15, 2017.

[davis-10] 1 2 Davis, Gerald F. (April 24, 2012). "Re-imagining the corporation" (PDF). Ross School of Business, University of Michigan. Archived (PDF) from the original on April 5, 2016. Retrieved February 15, 2017.

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