What Is a Public Company? How Public Companies Work

A public company (also known as a publicly traded company or public limited company) is a business entity that allows the general public to own equity shares. These shares are traditionally sold on a stock exchange to brokers, traders, and investors. Major stock exchanges like the New York Stock Exchange and the NASDAQ contain thousands of publicly traded companies in which retail investors can buy stock.

Although most shares of a public corporation are bought and sold in public markets, this does not mean that individual shareholders control the company. Rather, shareholders may vote on a board of directors, which in turn hires an executive team to oversee the day-to-day business activities of the company.

A public company differs from a private company in several distinct ways.

1. 1. Stockholder ownership: While many private companies are owned by a small group of individuals (or even one single person), most public companies have majority ownership from their stockholders, who buy and sell securities as a way to make money.
2. 2. Board of directors: Individual stockholders are represented by a board of directors, which hires the day-to-day decision-makers who actually run a company.
3. 3. Corporate leadership: Most public companies are managed by a chief executive officer (CEO) who leads a team of executives, vice presidents, and managers.
4. 4. Public financial information: Due to regulatory guidelines established in part by the Securities Exchange Act of 1934, public companies are held to financial reporting standards and disclosure requirements. This lets their investors make an accurate valuation of the company.

For investors, buying stock in a public company offers the following benefits:

1. 1. Transparency: Before going public in an initial public offering (IPO), a company must file financial statements that reveal its business model, including its cash liquidity and corporate finance structure.
2. 2. Ongoing reporting requirements: The U.S. Securities and Exchange Commission (SEC) regulates publicly traded companies and requires them to issue an annual report on their finances, along with additional information about their corporate structure. This keeps shareholders appraised of business activities.
3. 3. Portfolio diversification: A retail investor can build a diverse financial portfolio by investing in a number of different public companies rather than sinking their entire savings into a single company.
4. 4. Access to capital: Companies that go public raise capital for their business operations and the salaries of employees. This access to cash can allow the company to initially run at a loss as it builds a customer base—provided its investors remain satisfied in the company's overall trajectory.

Investing in public companies does come with its downsides.

1. 1. Minimal investor control: Most retail investors have little to no control over a publicly traded company's business operations. They may cast single votes for board members, but it's the board that has true control. Some public companies even give their founders veto-proof majority over corporate board decisions.
2. 2. Risk: In the contemporary business economy, a publicly traded company may get valued at prices that greatly exceed its actual revenue and cash on hand. If it cannot become profitable in a reasonable amount of time, it risks bankruptcy, and shareholder value rapidly diminishes.
3. 3. Regulation: From a company perspective, going public comes with some degree of headache. Government reporting requirements can require a major investment in staff and vendor services.

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