Public company
Encyclopedia
This is not the same as a Government-owned corporation
.
A public company or publicly traded company is a limited liability
company
that offers its securities
(stock/shares
, bonds/loans
, etc.) for sale to the general public, typically through a stock exchange
, or through market makers operating in over the counter
markets. This is separate and distinct from a Government-owned corporation which might be described as a publicly-owned company.
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
; companies that report under the 1934 Act are generally deemed public companies. The first company to issue shares is generally held to be the Dutch East India Company
in 1601
, but quasi-corporate entities, often trading or shipping concerns, are known to have existed as far back as Roman times.
through the sale of its securities. 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.
The financial media and city analysts will be able to access additional information about the business.
containing a comprehensive detail of a company's performance. Privately held companies do not file form 10-Ks; they leak less information to competitors, and they tend to be under less pressure to meet quarterly projections for sales and profits.
Publicly traded companies are also required to spend more for certified public accountant
s and other bureaucratic
paperwork
required of all publicly traded companies under government regulations. For example, the Sarbanes-Oxley Act
in the United States
does not apply to privately held companies. The money and income of the owners remains relatively unknown by the public.
which converts the privately held company into a publicly traded company or an acquisition of a company by publicly traded company.
However, some companies choose to remain privately held for a long period of time after maturity into a profitable company. Investment banking firm Goldman Sachs
and shipping services provider United Parcel Service
(UPS) are examples of companies which remained privately held for many years after maturing into profitable companies.
and occurs when the buyers believe the securities have been undervalued by investors. Publicly held companies can also become privately held by having all of their shares purchased by an individual or small group of investors, or by another company that is privately held.
In addition, one publicly traded company may be purchased by one or more publicly traded company(ies), with the bought-out company either becoming a subsidiary
or joint venture
of the purchaser(s) or ceasing to exist as a separate entity, its former shareholders receiving either cash, shares in the purchasing company or a combination of both. When the compensation in question is primarily shares then the deal is often considered a merger. 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-outs.
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. Normally some form of supermajority
is required for this sort of the offer to be approved, but once it happens then usually all shareholders are compelled to sell at the agreed-upon price and the company either becomes a subsidiary, ceases to exist or becomes privately held.
. 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.
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
(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 effects of recent news.
Government-owned corporation
A government-owned corporation, state-owned company, state-owned entity, state enterprise, publicly owned corporation, government business enterprise, or parastatal is a legal entity created by a government to undertake commercial activities on behalf of an owner government...
.
A public company or publicly traded company is a limited liability
Limited liability
Limited liability is a concept where by a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership with limited liability. If a company with limited liability is sued, then the plaintiffs are suing the company, not its...
company
Company
A company is a form of business organization. It is an association or collection of individual real persons and/or other companies, who each provide some form of capital. This group has a common purpose or focus and an aim of gaining profits. This collection, group or association of persons can be...
that offers its securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
(stock/shares
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
, bonds/loans
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
, etc.) for sale to the general public, typically through a stock exchange
Stock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
, or through market makers operating in over the counter
Over-the-counter (finance)
Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange. Products traded on the exchange must be well standardised to transparent trading....
markets. This is separate and distinct from a Government-owned corporation which might be described as a publicly-owned company.
Securities of a public company
Usually, the securities of a publicly traded company are owned by many investors while the shares of a privately held companyPrivately held company
A privately held company or close corporation is a business company owned either by non-governmental organizations or by a relatively small number of shareholders or company members which does not offer or trade its company stock to the general public on the stock market exchanges, but rather the...
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
Securities Exchange Act of 1934
The Securities Exchange Act of 1934 , , codified at et seq., is a law governing the secondary trading of securities in the United States of America. It was a sweeping piece of legislation...
; companies that report under the 1934 Act are generally deemed public companies. The first company to issue shares is generally held to be the Dutch East India Company
Dutch East India Company
The Dutch East India Company was a chartered company established in 1602, when the States-General of the Netherlands granted it a 21-year monopoly to carry out colonial activities in Asia...
in 1601
, but quasi-corporate entities, often trading or shipping concerns, are known to have existed as far back as Roman times.
Advantages
Publicly traded companies are able to raise funds and capitalCapital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
through the sale of its securities. 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.
The financial media and city analysts will be able to access additional information about the business.
Disadvantages
Privately held companies have several advantages over publicly traded companies. A privately held company has no requirement to publicly disclose much, if any financial information; such information could be useful to competitors. For example, publicly traded companies in the United States are required by the SEC to submit an annual Form 10-KForm 10-K
A Form 10-K is an annual report required by the U.S. Securities and Exchange Commission , that gives a comprehensive summary of a public company's performance...
containing a comprehensive detail of a company's performance. Privately held companies do not file form 10-Ks; they leak less information to competitors, and they tend to be under less pressure to meet quarterly projections for sales and profits.
Publicly traded companies are also required to spend more for certified public accountant
Certified Public Accountant
Certified Public Accountant is the statutory title of qualified accountants in the United States who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements for certification as a CPA...
s and other bureaucratic
Bureaucracy
A bureaucracy is an organization of non-elected officials of a governmental or organization who implement the rules, laws, and functions of their institution, and are occasionally characterized by officialism and red tape.-Weberian bureaucracy:...
paperwork
Paperwork
Paperwork is a term used to describe excessive, intricate or meticulous work with documents in an unnecessary and incidental way to more important tasks.- United States Paperwork Reduction Act :...
required of all publicly traded companies under government regulations. For example, the Sarbanes-Oxley Act
Sarbanes-Oxley Act
The Sarbanes–Oxley Act of 2002 , also known as the 'Public Company Accounting Reform and Investor Protection Act' and 'Corporate and Auditing Accountability and Responsibility Act' and commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002, which...
in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
does not apply to privately held companies. The money and income of the owners remains relatively unknown by the public.
Stockholders
In the United States, the Securities and Exchange Commission requires that firms whose stock is traded publicly report their major stockholders 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
The norm is for new companies, which are typically small, to be privately held. After a number of years, if a company has grown significantly and is profitable, or has promising prospects, there is often an initial public offeringInitial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
which converts the privately held company into a publicly traded company or an acquisition of a company by publicly traded company.
However, some companies choose to remain privately held for a long period of time after maturity into a profitable company. Investment banking firm Goldman Sachs
Goldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...
and shipping services provider United Parcel Service
United Parcel Service
United Parcel Service, Inc. , typically referred to by the acronym UPS, is a package delivery company. Headquartered in Sandy Springs, Georgia, United States, UPS delivers more than 15 million packages a day to 6.1 million customers in more than 220 countries and territories around the...
(UPS) are examples of companies which remained privately held for many years after maturing into profitable companies.
Privatization
Less common, but not unknown, is for a public company to buy out its shareholders and become private. This is typically done through a leveraged buyoutLeveraged buyout
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...
and occurs when the buyers believe the securities have been undervalued by investors. Publicly held companies can also become privately held by having all of their shares purchased by an individual or small group of investors, or by another company that is privately held.
In addition, one publicly traded company may be purchased by one or more publicly traded company(ies), with the bought-out company either becoming a subsidiary
Subsidiary
A subsidiary company, subsidiary, or daughter company is a company that is completely or partly owned and wholly controlled by another company that owns more than half of the subsidiary's stock. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a...
or joint venture
Joint venture
A joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets...
of the purchaser(s) or ceasing to exist as a separate entity, its former shareholders receiving either cash, shares in the purchasing company or a combination of both. When the compensation in question is primarily shares then the deal is often considered a merger. Subsidiaries and joint ventures can also be created de novo
De novo
In general usage, de novo is a Latin expression meaning "from the beginning," "afresh," "anew," "beginning again." It is used in:* De novo transcriptome assembly, the method of creating a transcriptome without a reference genome...
- 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-outs.
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. Normally some form of supermajority
Supermajority
A supermajority or a qualified majority is a requirement for a proposal to gain a specified level or type of support which exceeds a simple majority . In some jurisdictions, for example, parliamentary procedure requires that any action that may alter the rights of the minority has a supermajority...
is required for this sort of the offer to be approved, but once it happens then usually all shareholders are compelled to sell at the agreed-upon price and the company either becomes a subsidiary, ceases to exist or becomes privately held.
Trading and valuation
The shares of a publicly traded company are often traded on a stock exchangeStock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
. The value or "size" of a company is called its market capitalization
Market capitalization
Market capitalization is a measurement of the value of the ownership interest that shareholders hold in a business enterprise. It is equal to the share price times the number of shares outstanding of a publicly traded company...
, 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 (finance)
Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange. Products traded on the exchange must be well standardised to transparent trading....
(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 effects of recent news.
See also
- plc, public company under UK legislationPublic limited companyA public limited company is a limited liability company that sells shares to the public in United Kingdom company law, in the Republic of Ireland and Commonwealth jurisdictions....
- Publicly unlisted companyPublicly unlisted companyA publicly unlisted company is a company that can have an unlimited number of shareholders to raise capital for any commercial venture. Companies which are not listed publicly are more likely to engage in profit maximising behavior as their share capital structure makes it very easy to give its...
- Privately held companyPrivately held companyA privately held company or close corporation is a business company owned either by non-governmental organizations or by a relatively small number of shareholders or company members which does not offer or trade its company stock to the general public on the stock market exchanges, but rather the...
- Public ownership
- Government-owned corporationGovernment-owned corporationA government-owned corporation, state-owned company, state-owned entity, state enterprise, publicly owned corporation, government business enterprise, or parastatal is a legal entity created by a government to undertake commercial activities on behalf of an owner government...
- Crown corporation
- Statutory corporationStatutory CorporationA statutory corporation or public body is a corporation created by statute. While artificial legal personality is almost always the result of statutory intervention, a statutory corporation does not include corporations owned by shareholders whose legal personality derives from being registered...
- Public bodies
- Non-departmental public bodyNon-departmental public bodyIn the United Kingdom, a non-departmental public body —often referred to as a quango—is a classification applied by the Cabinet Office, Treasury, Scottish Government and Northern Ireland Executive to certain types of public bodies...
- Federal agencyFederal agencyFederal agency may refer to:*United States federal agencies—see List of United States federal agencies*Federal agency -See also:*Government agency*Statutory corporation*Statutory Agency*Crown corporation*Government-owned corporation...
- Government agencyGovernment agencyA government or state agency 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 intelligence agency. There is a notable variety of agency types...
- Regulatory agency
- Statutory Agency