Finance:Public company
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A public company[lower-alpha 1] is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange (listed company), which facilitates the trade of shares, or not (unlisted public company). In some jurisdictions, public companies over a certain size must be listed on an exchange. In most cases, public companies are private enterprises in the private sector, and "public" emphasizes their reporting and trading on the public markets.
Public companies are formed within the legal systems of particular states and therefore have associations and formal designations that are distinct and separate within the polity in which they reside. In the United States, for example, a public company is usually a type of corporation, though a corporation need not be a public company. In the United Kingdom, it is usually a public limited company (PLC). In France, it is a société anonyme (SA). In Germany, it is an Aktiengesellschaft (AG). While the general idea of a public company may be similar, the differences between types are meaningful and are at the core of international law disputes with regard to industry and trade.
Securities
Advantages and disadvantages
Advantages
Publicly traded companies are able to raise funds and capital through the sale (in the primary market or secondary market) of shares of stock. Prior to their existence, it was very difficult to obtain large amounts of capital for private enterprises, as significant capital could come only from a smaller set of wealthy investors or banks willing to risk typically large investments. The profit on stock is gained in form of dividends or capital gains to the holders.
The financial media, analysts, and the public are able to access additional information about the business, since the business is commonly legally bound, and naturally motivated (so as to secure further capital), to disseminate public information regarding the financial status and future of the company to its many 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.
The initial shareholders of the company are able to share risk by selling shares to the public. For example, the founder of Facebook, Mark Zuckerberg, owned 29.3% of the company's class A shares in 2013,[1] which gave him enough voting power to control the business and allowed Facebook to raise capital from and to distribute risk to the remaining shareholders. Facebook had been a privately held company prior to its initial public offering in 2012.[2]
Public companies have fiduciary duty to their shareholders, in addition to the directors' fiduciary duty to the company itself.
Disadvantages
Many stock exchanges require that publicly traded companies have their accounts regularly audited by outside auditors and then publish the accounts to their shareholders. Besides the cost, that may make useful information available to competitors. Various other annual and quarterly reports are also required by law. In the United States, the Sarbanes–Oxley Act imposes additional requirements. The requirement for audited books is not imposed by the exchange known as OTC Pink.[3][4] The shares may be maliciously held by outside shareholders and the original founders or owners may lose benefits and control. The principal–agent problem, or the agency problem is a key weakness of public companies. The separation of a company's ownership and control is especially prevalent in such countries as the United Kingdom and the United States.[5][6]
Stockholders
In the United States, the Securities and Exchange Commission requires firms whose stock is traded publicly to report their major shareholders each year.[7] The reports identify all institutional shareholders (primarily firms that own stock in other companies), all company officials who own shares in their firm, and all individuals or institutions owning more than 5% of the firm's stock.[7]
General trend
For many years, newly created companies were initially privately held but later held initial public offerings to become publicly traded companies, or they were acquired by another company if they became larger and more profitable or had promising prospects. More infrequently, some companies such as the investment banking firm Goldman Sachs and the logistics services provider United Parcel Service (UPS) chose to remain privately held for a long period of time after maturity into a profitable company.
However, from 1997 to 2012, the number of corporations publicly traded on US stock exchanges dropped 45%.[8] According to one observer (Gerald F. Davis), "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".[9]
Privatization
Trading and valuation
The shares of a publicly traded company are often traded on a stock exchange. 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 is influenced by a host of other factors including prevailing market conditions, liquidity, investor sentiment, differing valuation methods, and more.
With the exception of over-the-counter (OTC) stocks—sometimes known as "penny stocks"—many publicly traded stocks in the US enjoy robust liquidity thanks to market makers, low-latency information transmission, and the proliferation of the digitization of trading platforms.
See also
- Forbes Global 2000
- Government agency
- Non-departmental public body
- plc, public company under UK legislation
- Stock exchange cooperative
- Statutory corporation
- Publicly unlisted company
- Regulatory agency
- Statutory authority
- Statutory corporation
- Success trap
- United Kingdom company law
Notes
- ↑ Also named publicly traded company, publicly held company, publicly listed company, publicly owned company or public limited company
References
- ↑ Dillet, Romain (February 15, 2013). "Zuckerberg Now Owns 29.3 Percent Of Facebook's Class A Shares And This Stake Is Worth $13.6 billion". https://techcrunch.com/2013/02/15/zuckerberg-now-owns-29-3-percent-of-facebook-representing-18-billion/.
- ↑ "If You Had Invested Right After Facebook's IPO (FB, TWTR)". Investopedia. August 14, 2015. https://www.investopedia.com/articles/markets/081415/if-your-would-have-invested-right-after-facebooks-ipo.asp.
- ↑ Devcic, John (September 21, 2014). "The Over-The-Counter Market: An Introduction To Pink Sheets". Investopedia. http://www.investopedia.com/articles/fundamental-analysis/08/pink-sheets-ottcb.asp.
- ↑ "Pink: The Open Market". http://www.otcmarkets.com/marketplaces/otc-pink.
- ↑ Jensen, Michael C.; Meckling, William H. (October 1976). "Theory of the firm: Managerial behavior, agency costs and ownership structure". Journal of Financial Economics 3 (4): 305–360. doi:10.1016/0304-405X(76)90026-X. https://periodicos.fgv.br/rae/article/download/36604/35381.
- ↑ Berle Jr., Adolf Augustus; Means, Gardiner Coit (2017). The Modern Corporation and Private Property. London; New York: Routledge; Taylor & Francis. ISBN 978-0-88738-887-3.
- ↑ 7.0 7.1 "Myth #5. The Federal Reserve is owned and controlled by foreigners.". Political Research Associates. http://www.publiceye.org/conspire/flaherty/flaherty5.html.
- ↑ "Is it time to rethink public corporations?". Minnesota Public Radio News. November 14, 2012. http://minnesota.publicradio.org/display/web/2012/11/14/daily-circuit-public-corporations/.
- ↑ Davis, Gerald F. (April 24, 2012). "Re-imagining the corporation". Ross School of Business, University of Michigan. http://webuser.bus.umich.edu/gfdavis/Papers/Davis-Reimagining-the-corporation.pdf.
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