A public company is a corporation whose ownership is distributed amongst general public shareholders via the free trade of shares of stock on exchanges or over-the-counter markets. Although a small percentage of shares are initially floated to the public, daily trading in the market determines the value of the entire company.
It is considered to be “public” since shareholders, who become equity owners of the company, may be composed of anybody who purchases stock in the firm.
Public companies are publicly traded within the open market, and a variety of investors buy the shares. Most public companies were once private companies that, after meeting all regulatory requirements, opted to become public to raise capital. Examples of public companies include Chevron Corporation, F5 Networks, Inc., Google LLC, and Proctor & Gamble Company.
Advantage of Public Company
Ability to raise funds by selling stock
One of the advantages that public companies enjoy is the ability to raise funds through the sale of the company’s stock to the public. Before becoming public, it is difficult to obtain large amounts of capital, other than through borrowing, to finance operations and new product offerings. A private entity can only get financing by reinvesting its profits, taking out a loan, or getting investments from a few wealthy individuals, who may not provide adequate capital to meet the company’s financial needs.
Public companies can raise funds in the primary and secondary markets by allowing the investing public to purchase shares of the company. The ability to raise large amounts of capital in public exchanges enables public companies to carry out capital-intensive activities. In return, the shareholders benefit from capital gains of stocks, as well as from dividend payments.
Availability of financial information
Public companies are required to file quarterly and annual financial statements and other mandatory documents with the SEC. The requirement allows shareholders, financial media, interested investors, and financial analysts to get access to additional information about the company.
The availability of financial information about the company makes it easier for analysts to calculate the valuation of the company. In contrast, private companies are not subject to legal requirements to make their financial reports public. Public companies are motivated to meet the disclosure requirements as a way of disseminating information about their financial performance and the future of the company to both current shareholders and potential investors.
Disadvantages of Public Companies
Increased government and regulatory scrutiny
Public companies are vulnerable to increased scrutiny from the government, regulatory agencies, and the public. The company must meet various mandatory reporting standards that are set by government entities such as the SEC and the IRS.
Strict adherence to global accounting standards
They must also prepare their financial reports in accordance with the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Shareholders are also entitled to key documents on the business activities of the company.