Public company
A company whose shares trade freely on public markets.
A public company is one where ownership is divided into shares of stock that are meant to be bought and sold freely, either on a stock exchange or through over-the-counter markets. These companies may be listed on an exchange, which makes trading easier, or they may remain unlisted. In certain countries, if a public company reaches a specific size, it is required to list on an exchange. Most public companies are private-sector businesses, and the term "public" refers to their obligation to report financial information and trade shares on public markets. The legal structure of a public company depends on the country where it is formed. For instance, in the United States, it is typically a corporation; in the United Kingdom, a public limited company (PLC); in France, a société anonyme (SA); and in Germany, an Aktiengesellschaft (AG). Although the basic concept is similar worldwide, these differences are significant and often central to international legal disputes about industry and trade.
Regarding securities, the shares of a publicly traded company are usually held by many investors, while a privately held company has relatively few shareholders. Having many shareholders does not automatically make a company publicly traded, and a publicly traded company does not always have a huge number of shareholders. In the United States, companies with more than 500 shareholders may be required to report under the Securities Exchange Act of 1934, and those that do report are generally considered public companies.
Public companies have several advantages. They can raise funds and capital by selling shares in the primary or secondary market. Before such companies existed, raising large amounts of capital was difficult for private enterprises, as it depended on a small group of wealthy investors or banks willing to take big risks. Profits for shareholders come in the form of dividends or capital gains. Because public companies are legally required—and naturally motivated—to share financial information and future plans with shareholders and the government, the media, analysts, and the public have access to more details about the business. This visibility can make the company more popular or recognizable than a private one. Initial shareholders can also spread risk by selling shares to the public. For example, Mark Zuckerberg owned 29.3% of Facebook’s class A shares in 20
- field
- Corporate finance and securities law
- known_for
- Raising capital through public sale of shares; subject to reporting and auditing requirements
- key_designations
- US: corporation; UK: PLC; France: SA; Germany: AG
Lore & Background
Publicly traded companies are able to raise funds and capital through the sale of shares of stock in primary or secondary markets. Prior to their existence, obtaining large amounts of capital for private enterprises was very difficult, as significant capital could come only from a smaller set of wealthy investors or banks. The profit on stock is gained in the form of dividends or capital gains to holders. The financial media, analysts, and the public can access additional information about the business, as the business is commonly legally bound and naturally motivated to disseminate public information regarding its financial status and future to 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. Initial shareholders can share risk by selling shares to the public. If some shares are given to managers or other employees, potential conflicts of interest between employees and shareholders (an instance of the principal–agent problem) may be remitted. Public companies have a fiduciary duty to their shareholders, in addition to the directors' fiduciary duty to the company itself.
Reader's Guide
Public companies are significant because they enable large-scale capital formation by allowing many investors to own shares and trade them freely. This innovation transformed private enterprise, making it possible to fund major industrial and technological ventures. However, public companies face disadvantages: many stock exchanges require regular audits and publication of accounts, which can be costly and reveal useful information to competitors. Various annual and quarterly reports are required by law; in the United States, the Sarbanes–Oxley Act imposes additional requirements. The shares may be maliciously held by outside shareholders, and original founders may lose benefits and control. The principal–agent problem—the separation of ownership and control—is a key weakness, especially in the United Kingdom and the United States. From 1997 to 2012, the number of corporations publicly traded on US stock exchanges dropped 45%, and according to one observer, 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. Public companies can be taken private through leveraged buyouts or mergers, and subsidiaries and joint ventures of publicly traded companies are generally subject to the same reporting requirements.
Did You Know?
- In the United States, companies with over 500 shareholders in some instances are required to report under the Securities Exchange Act of 1934.
- The founder of Facebook, Mark Zuckerberg, owned 29.3% of the company's class A shares in 2013, which gave him enough voting power to control the business.
- From 1997 to 2012, the number of corporations publicly traded on US stock exchanges dropped 45%.
- The requirement for audited books is not imposed by the exchange known as OTC Pink.
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