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A public company is a
company A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared go ...
whose ownership is organized via shares of
stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
which are intended to be freely traded on a
stock exchange 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 ...
or in
over-the-counter Over-the-counter (OTC) drugs are medicines sold directly to a consumer without a requirement for a prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to consumers possessing a valid presc ...
markets. A public (publicly traded) company can be listed on a stock exchange (
listed company A public company 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 ( lis ...
), which facilitates the trade of shares, or not (
unlisted public company An unlisted public company is a public company that is not listed on any stock exchange. Though the criteria vary somewhat between jurisdictions, a public company is a company that is registered as such and generally has a minimum share capital an ...
). 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 system The contemporary national legal systems are generally based on one of four basic systems: civil law, common law, statutory law, religious law or combinations of these. However, the legal system of each country is shaped by its unique history an ...
s of particular states, and therefore have associations and formal designations which are distinct and separate in the polity in which they reside. In the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territo ...
, for example, a public company is usually a type of corporation (though a corporation need not be a public company), in the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and Nor ...
it is usually a
public limited company A public limited company (legally abbreviated to PLC or plc) is a type of public company under United Kingdom company law, some Commonwealth jurisdictions, and the Republic of Ireland. It is a limited liability company whose shares may be freel ...
(plc), in France a "
société anonyme The abbreviation S.A. or SA designates a type of limited company in certain countries, most of which have a Romance language as their official language and employ civil law. Originally, shareholders could be literally anonymous and collect di ...
" (SA), and in Germany an
Aktiengesellschaft (; abbreviated AG, ) is a German word for a corporation limited by share ownership (i.e. one which is owned by its shareholders) whose shares may be traded on a stock market. The term is used in Germany, Austria, Switzerland (where it is equi ...
(AG). While the general idea of a public company may be similar, differences are meaningful, and are at the core of
international law International law (also known as public international law and the law of nations) is the set of rules, norms, and standards generally recognized as binding between states. It establishes normative guidelines and a common conceptual framework for ...
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 A privately held company (or simply a private company) is a company whose shares and related rights or obligations are not offered for public subscription or publicly negotiated in the respective listed markets, but rather the company's stock is ...
are owned by relatively few shareholders. A company with many shareholders is not necessarily a publicly traded company. In the United States, in some instances, companies with over 500 shareholders may be required to report under the
Securities Exchange Act of 1934 The Securities Exchange Act of 1934 (also called the Exchange Act, '34 Act, or 1934 Act) (, codified at et seq.) is a law governing the secondary trading of securities (stocks, bonds, and debentures) in the United States of America. A landma ...
; companies that report under the 1934 Act are generally deemed public companies.


Advantages and disadvantages


Advantages

Public companies possess some advantages over privately held businesses. * Publicly traded companies are able to raise funds and
capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the durable produced goods used fo ...
through the sale (in the primary or secondary market) of shares of
stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
. This is the reason publicly traded corporations are important; prior to their existence, it was very difficult to obtain large amounts of capital for private enterprises, as significant capital could only come 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 A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-in ...
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 publicly disseminate 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. If one were to hold a 100% share of the company, they would have to pay all of the business's debt; however, if an individual were to hold a 50% share, they would only need to pay 50% of the debt. This increases asset liquidity and the company does not need to depend on funding from a bank. For example, in 2013 Facebook founder
Mark Zuckerberg Mark Elliot Zuckerberg (; born ) is an American business magnate, internet entrepreneur, and philanthropist. He is known for co-founding the social media website Facebook and its parent company Meta Platforms (formerly Facebook, Inc.), of ...
owned 29.3% of the company's class A shares, which gave him enough voting power to control the business, while allowing Facebook to raise capital from, and distribute risk to, the remaining shareholders. Facebook was a privately held company prior to its
initial public offering An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investment ...
in 2012. * If some shares are given to managers or other employees, potential conflicts of interest between employees and shareholders (an instance of
principal–agent problem The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity (the "agent") takes actions on behalf of another person or entity (the " principal"). The problem worsens when there is a gre ...
) will be remitted. As an example, in many tech companies, entry-level software engineers are given stock in the company upon being hired (thus 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. * Public companies by their
fiduciary A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exampl ...
duty are legally forbidden from taking an action that may decrease the stock price or failing to take any action that may increase it. Perpetual growth is the goal of every public company.


Disadvantages

Many stock exchanges require that publicly traded companies have their accounts regularly
audited An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing ...
by outside auditors, and then publish the accounts to their shareholders. Besides the cost, this 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 The Sarbanes–Oxley Act of 2002 is a United States federal law that mandates certain practices in financial record keeping and reporting for corporations. The act, (), also known as the "Public Company Accounting Reform and Investor Protecti ...
imposes additional requirements. The requirement for audited books is not imposed by the exchange known as OTC Pink. The shares may be maliciously held by outside shareholders and the original founders or owners may lose benefits and control. The
principal–agent problem The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity (the "agent") takes actions on behalf of another person or entity (the " principal"). The problem worsens when there is a gre ...
, 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 UK and the US.


Stockholders

In the United States, the
Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agencies of the United States government, independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary pu ...
requires that firms whose stock is traded publicly report their major
shareholder A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal ow ...
s each year. The reports identify all institutional shareholders (primarily, firms owning stock in other companies), all company officials who own shares in their firm, and any individual or institution owning more than 5% of the firm's stock.


General trend

For many years, newly created companies were privately held but held
initial public offering An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investment ...
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 investment banking firm
Goldman Sachs Goldman Sachs () is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered at 200 West Street in Lower Manhattan, with regional headquarters in London, Warsaw, Bangalore, Hong ...
and logistics services provider
United Parcel Service United Parcel Service (UPS, stylized as ups) is an American multinational shipping & receiving and supply chain management company founded in 1907. Originally known as the American Messenger Company specializing in telegraphs, UPS has grown t ...
(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 American stock exchanges dropped 45%. 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". Davis argues that technological changes such as the decline in price and increasing power, quality and flexibility of
computer numerical control Numerical control (also computer numerical control, and commonly called CNC) is the automated control of machining tools (such as drills, lathes, mills, grinders, routers and 3D printers) by means of a computer. A CNC machine processes a pi ...
machines and newer digitally enabled tools such as
3D printing 3D printing or additive manufacturing is the construction of a three-dimensional object from a CAD model or a digital 3D model. It can be done in a variety of processes in which material is deposited, joined or solidified under computer ...
will lead to smaller and more local organization of production.


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. This is typically done through a
leveraged buyout A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money ( leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loa ...
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 this would be to make a
rights issue 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 b ...
designed to enable the new investor to acquire a
supermajority A supermajority, supra-majority, qualified majority, or special majority is a requirement for a proposal to gain a specified level of support which is greater than the threshold of more than one-half used for a simple majority. Supermajority ru ...
. With a super-majority, the company could then be relisted, i.e. privatized. Alternatively, a publicly traded company may be purchased by one or more other publicly traded companies, with the target company becoming either a
subsidiary A subsidiary, subsidiary company or daughter company is a company owned or controlled by another company, which is called the parent company or holding company. Two or more subsidiaries that either belong to the same parent company or having a sam ...
or
joint venture A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures for one of four reasons: to access ...
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 Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...
. Subsidiaries and joint ventures can also be created '' de novo''—this 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-out A corporate spin-off, also known as a spin-out, or starburst or hive-off, is a type of corporate action where a company "splits off" a section as a separate business or creates a second incarnation, even if the first is still active. Characte ...
s. 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. This often entails the would-be buyer(s) making a formal offer for each share of the company to shareholders.


Trading and valuation

The shares of a publicly traded company are often traded on a
stock exchange 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 ...
. The value or "size" of a company is called its
market capitalization Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders. Market capitalization is equal to the market price per common share multiplied by t ...
, 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. 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. 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 Over-the-counter (OTC) drugs are medicines sold directly to a consumer without a requirement for a prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to consumers possessing a valid presc ...
(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.


See also

* ''Forbes'' Global 2000 *
Government agency A government or state agency, sometimes an appointed commission, is a permanent or semi-permanent organization in the machinery of government that is responsible for the oversight and administration of specific functions, such as an administratio ...
*
Non-departmental public body In the United Kingdom, non-departmental public body (NDPB) is a classification applied by the Cabinet Office, Treasury, the Scottish Government and the Northern Ireland Executive to public sector organisations that have a role in the process of na ...
* plc, public company under UK legislation *
Public bodies A statutory corporation is a government entity created as a statutory body by statute. Their precise nature varies by jurisdiction, thus, they are statutes owned by a government or controlled by national or sub-national government to the (in so ...
* Publicly unlisted company *
Regulatory agency A regulatory agency (regulatory body, regulator) or independent agency (independent regulatory agency) is a government authority that is responsible for exercising autonomous dominion over some area of human activity in a licensing and regulati ...
*
Statutory authority A statutory body or statutory authority is a body set up by law (statute) that is authorised to implement certain legislation on behalf of the relevant country or state, sometimes by being empowered or delegated to set rules (for example reg ...
*
Statutory corporation A statutory corporation is a government entity created as a statutory body by statute. Their precise nature varies by jurisdiction, thus, they are statutes owned by a government or controlled by national or sub-national government to the (in so ...
* Success trap *
UK company law The United Kingdom company law regulates corporations formed under the Companies Act 2006. Also governed by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary legal ...


Notes


References

{{DEFAULTSORT:Public Company Types of business entity