What are Publicly Traded Companies?

//What are Publicly Traded Companies?
What are Publicly Traded Companies? 2017-10-09T07:44:36+00:00

Definition: Publicly traded companies, or public companies, are corporations that have sold their shares on a public stock exchange through an initial public offering to the general public. This allows anyone to purchase or sell ownership shares of the company.

What does Publicly Traded Company Mean?

What is the definition of publicly traded company? These corporations sell their stock on a public stock exchange to the general public. This makes the stock readily available to all investors and also gives the company relatively easy access to capital. Since there are millions of investors trading stocks on the public exchanges, a public company typically can find investors who are willing to purchase new offerings and fund expansions.

Contrast this with a private company that is owned by a few private investors. These companies don’t have near the reach or access to capital that public companies do. A private company would either have to take on new investors, require the current investors to contribute more funds, or take on debt in order to raise funds.

All public companies are regulated by the Securities and Exchange Commission and overseen by the PCAOB. These regulatory bodies enforce strict financial rules and guidelines on public company financial reporting in an effort to protect investors. This is heavily warranted since most public company investors do not have insider access to the company operations. They don’t know what is actually going on within the company. All they know is what the company reports on their financial statements and management reports. Without proper oversight, these companies could mislead investors as to the real value of the corporation.

Let’s take a look at an example.

Example

Pivot, Co. started as a sole proprietorship in 1990 by Dave Pivot. Dave grow the company over the course of 10 years and needed additional funds to grow the business, so he took on investors and turned the company into a corporation.

Over the next five years Dave and his team successfully grew the company to $1B in annual revenues. Along the way, the original investors had to keep contributing money to fund the expansion of the company. Now Dave, the management team, and the investors want to take the company public in order to cash out of their investment and fund the next round of expansions.

Thus, the company hires an investment bank and they schedule the company IPO. Now the original investors can readily sell their shares on the open market and get a return from the growth of the company since their original investment.

Summary Definition

Define Publicly Traded Companies: Publicly traded company means a corporation that sells its ownership shares on a stock exchange to the public at large.