Public company

Public company

A public company is a company that trades on the stock exchanges through the issuance of shares.

Trading public companies

Trading public companies follows the same principles as trading other asset classes. Fundamental analysis, technical analysis, money management and other areas of knowledge are helping traders understand the price development.

Many online brokers allow to trade the shares of public companies comfortably:

Forum on public companies:

Initial public offering

New companies are always started as private firms – they go public when they decide to offer shares to traders and investors through an initial public offering (IPO).

Once the shares are available on the markets (the "free float"), the company becomes answerable to its shareholders and must comply with the rules of all the stock exchanges it is listed on as well as the financial regulations and laws in the countries where it trades, such as meeting required reporting and accounting standards.

Price movements on publicly traded shares indicate to traders and analysts alike what the market capitalisation and market value of the company are. Public companies are obliged to issue annual reports; usually, quarterly and half-yearly financial results as well. This makes it much easier for analysts, financial journalists and even interested members of the public to gain greater insight into a company’s operations.

In the United Kingdom, public companies are more usually known as public limited companies (plc) because legally, it is the company that has liabilities, which are limited, and not the shareholders.

Why do companies go public?

The main advantage of issuing shares to the public is that a company can quickly raise capital to enable growth and expansion. The capital raised may be in the form of either debt or equity. Private companies can usually only access capital through a bank loan or venture capitalist.

Once shares are circulating on the stock exchanges, a company can make further issuances if it needs to raise more capital. For companies with high share prices that are not experiencing much volatility this is a comparably easy way to increase equity and thus market capitalisation.

The downsides of going public include increased administration costs – more stringent rules for accounting and reporting requires the involvement of qualified experts. For accounting particularly, external companies will be involved to ensure independent auditing.

Furthermore, the required disclosure of information is available to competitor companies as well, which may give them commercial advantages, for example by reading between the lines of the balance sheet.

Staying private

Privately owned companies do not generally have access to huge sums of capital, which can restrict their growth at times when they need to be able to do so (for example, experiencing higher order rates but not having the funds to expand their factories to cope with demand).

On the plus side, private companies are generally not legally obliged to disclose much, or indeed, any information about their finances or activities. This protects them from competitors who could exploit such information.

Sometimes public companies decide to return to private status. This is usually achieved by buying back their shares on the stock exchanges and this may be announced publicly to warn shareholders, analysts and journalists of this intention.

Reasons for doing so may be to restore full control of the company to its directors, or to unshackle the burdens of regulation, public reporting and disclosure – the latter means the company can instead focus purely on its future goals.

Buyouts

Public companies can be taken off the market through buyouts. If a shareholder or group of shareholders acquire a large enough percentage of shares they could force the company to be taken over by them through a formal offer.

A public company may also be swallowed up by another company through an acquisition or merger. In this case, the bought company would de-list and be treated as a sub-division of the new parent company.

Shareholders in the de-listed company will either be offered compensation in the form of cash for their shares or the option to trade them in for purchasing the company’s shares. It could, of course, return to public status in the future as a "spinout".

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