Understanding Public Company – Role, Benefits and Challenges

Understanding Public Company: A Simple Guide

When you hear the term “public company,” you might think of big companies like Apple, Amazon, or Coca-Cola. These companies are called “publicly traded” because anyone can buy shares of their stock on the market. But what does it really mean to be a “public company”?

In this guide, we will explain what public companies are, how they work, their pros and cons, and how they affect both investors and the economy.

Key Takeaways

1. Public companies are businesses that sell shares to the public on a stock exchange.
2. To become a public company, a business must go through an IPO where it offers shares to the public for the first time.
3. Public companies list their shares on stock exchanges like the NYSE or Nasdaq, and each company gets a unique ticker symbol to help investors find and trade its shares.
4. Public companies are closely monitored by the Securities and Exchange Commission (SEC), which makes sure they follow the rules.
5. Shareholders own part of the company and have the right to vote on important issues, such as choosing board members and approving big changes like mergers.

What is a Public Company?

A public company is a company whose shares are listed on a public stock exchange. This means that anyone can buy shares of the company on the stock market. The biggest difference between a public company and a private company is that the shares of a public company are available to everyone whereas Private companies are only owned by a smaller group of people or investors.

Let’s Understand with the help of an Example: Imagine you want to buy shares in a company. If the company is a private company, you can’t just go online and buy shares. You would have to be part of a special group of investors or know someone who works at the company. But if the company is public, you can buy shares through stock exchanges like Nasdaq or the New York Stock Exchange (NYSE). These are places where public companies sell their shares to the public.

How Does a Company Become Public?

A company becomes a public company through a process called an Initial Public Offering (IPO). An IPO is when a company decides to sell its shares to the public for the first time. This helps the company raise money, which they can use to pay off debts, grow their business, or expand.

Becoming public is a big step for a company. It can raise a lot of money, but it also comes with challenges. The company now has to follow many rules and share information with the public.

One famous example is Facebook. In 2012, Facebook became public with an IPO. It raised billions of dollars by selling shares. This helped Facebook grow into one of the biggest companies in the world today. Even though the IPO process was difficult, it played a big role in Facebook’s success.

What Happens After the IPO?

Once a company becomes public, it must follow many rules set by the Securities and Exchange Commission (SEC). The SEC is a U.S. government agency that makes sure public companies are being honest with their investors and following the law.

For example, public companies must release quarterly earnings reports and annual reports. These reports include important financial information that helps investors decide whether to buy or sell shares. Public companies must also tell investors about any big changes in their business, like mergers, new partnerships, or acquisitions.

These reports show investors how well the company is doing. For example, if a company’s earnings report shows high profits, investors might want to buy shares, which could make the stock price go up. If the report shows poor performance, investors might sell their shares, causing the stock price to go down.

What is the Role of the Stock Exchange in Public Companies

The stock exchange is very important for public companies. It is where shares of public companies are bought and sold. Some of the biggest stock exchanges are the NYSE, Nasdaq, and the London Stock Exchange (LSE).

The stock exchange is also where a company gets its ticker symbol, which is a short code used to identify its shares. For example, Apple‘s ticker symbol is AAPL, and Amazon‘s ticker symbol is AMZN. Ticker symbols make it easier for investors to find and trade shares of a company.

Benefits of a Public Company

Being a public company has many benefits. Here are some of the most important ones:

1. Access to Capital: One of the main reasons companies go public is to raise money. By selling shares to the public, a company can raise a large amount of money. This money can be used for growth, paying off debts, or other business needs. Example: Tesla, which went public in 2010, used the money from its IPO and later stock sales to fund its research on electric vehicles and battery technology.
2. Increased Visibility: Public companies often get more attention from the media, analysts, and investors. This can help the company grow its profile and attract more customers and business opportunities.
3. Stock Liquidity: Shares of a public company are easier to buy and sell compared to private companies. This gives investors more flexibility because they can sell their shares whenever they want.
4. Stock-Based Compensation: Public companies can offer stock options or other types of equity-based pay to their employees. This is a good way to attract and keep talented workers because they can benefit from the company’s success.

Challenges of a Public Company

While being a public company has many benefits, it also comes with some challenges. Here are a few of the main ones:

1. Regulatory Compliance: Public companies must follow strict rules set by the Securities and Exchange Commission (SEC) and other regulators. This can be costly and time-consuming. Example: Public companies must file reports like Form 10-K (annual report) and Form 10-Q (quarterly report), which require accurate and detailed financial information. If a company doesn’t follow these rules, it can face serious penalties.
2. Market Pressure: Public companies often face pressure from investors to meet short-term goals. Companies are expected to meet certain financial targets every three months, which can make it harder to focus on long-term goals.
3. Loss of Control: When a company goes public, the original owners, like the founders, may lose some control. Shareholders (the people who own shares) now have voting rights and can influence how the company is run.
4. Vulnerability to Market Changes: Public companies are affected by the ups and downs of the stock market. Even if the company is doing well, outside factors like market trends or economic problems can make the stock price go up or down. This can be frustrating for both the company’s managers and investors.

How Public Company is Governed ?

Public companies must have a board of directors. The board makes important decisions like hiring executives, setting the company’s strategy, and approving big changes like mergers or acquisitions.

Public companies also follow corporate governance practices, which are rules that ensure the company is run fairly and transparently. For example, companies must tell shareholders if there are any conflicts of interest and make sure shareholders are treated fairly when decisions are made.

How Stock Prices Affect Public Companies

The price of a public company’s stock can affect the company a lot. If the stock price goes up, it can create a positive cycle. Investors will feel more confident in the company, which leads to more investments, and the stock price goes up even more.

However, if the stock price goes down, it can hurt the company’s reputation and make it harder to raise money. For example, when Facebook went public in 2012, its stock price didn’t do well at first, which caused some concern. But over time, Facebook’s stock price recovered and grew a lot.

You can Read More Terms Related to Financial Market.

Mergers and Acquisitions (M&A) in Public Companies

Public companies often use mergers and acquisitions (M&A) to grow and expand. A merger happens when two companies join together to form a larger company. An acquisition happens when one company buys another.

M&A can change industries, help companies gain more market share, save money, and create new business opportunities. However, these deals can also bring challenges, like problems with combining the companies, following regulations, or dealing with resistance from shareholders or employees.

Example: A famous acquisition was Disney buying Marvel Entertainment in 2009. This allowed Disney to add Marvel’s popular superhero franchises to its business, which has made a lot of money since.

Conclusion

Public companies are very important for the global economy. They offer investment opportunities, create jobs, and drive new ideas and inventions. Becoming a public company helps businesses raise money and grow, but it also comes with extra responsibilities like following rules and handling market pressure.

Frequently Asked Questions (FAQ) about Public Companies