Takeaways
- Publicly traded company shares can be purchased and added to an investor's online stock brokerage account.
- Publicly traded companies are listed on stock exchanges like the NYSE or NASDAQ for trading.
- Private companies become public through an initial public offering (IPO).
- Public companies must adhere to strict financial and legal regulations set by governing bodies like the SEC.
- Public companies have easier access to capital and increase credibility.
What Is a Publicly Traded Company?
A publicly traded company is a business that has sold shares to the public through a stock exchange. Going public allows the company to raise capital to fund operations, expand its business, or launch new products. Retail investors and institutional investors purchase shares in a new public company through an initial public offering.
Once a company "goes public"', its shares are available for purchase by anyone with an online stock brokerage account. This is unlike private companies, where the shareholder base is much more concentrated. This smaller cohort comprises founders, early-stage private investors (usually accredited investors), and employees.
Public companies are subject to a highly regulated securities market. This means they must adhere to applicable regulatory requirements set by U.S. governing bodies like the Securities and Exchange Commission (SEC). These regulations are designed to protect investors and promote transparency in financial reporting. Public companies must make regular financial disclosures of their financial position, business activities, and overview of their company's plans.
Stock traders, retail investors, and institutional investors determine the current price per share. The company's performance, industry outlook, and other micro and macroeconomic factors influence the market price.
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How Private Companies Become Public
When a privately held company decides to sell shares to become a publicly traded company, they do this through an initial public offering, or IPO. When a company debuts on a stock exchange through an IPO, it offers shares to the public for the first time. The whole process starts with the company working with an investment bank that underwrites the offering. The investment bank helps determine market demand by setting the price of the shares in an IPO and the total number of shares to be issued.
Then, the company must register a statement with the SEC, known as a prospectus. The prospectus provides detailed information about the company's business and financial situation and a full assessment of the risks associated with investing in shares. Once the SEC approves the prospectus, the company and the investment bank promote the IPO to potential institutional investors.[1]
On the day of the IPO, shares are listed on a stock exchange like the New York Stock Exchange or the NASDAQ. Once listed, the shares are available for purchase by anyone, and the funds raised during the IPO can enable the company to expand, lower debt, or invest in new projects or markets.
Once the IPO is over, the company must regularly comply with all the needed reporting requirements, financial disclosures, and operational details. This company then works to maintain and build investor confidence. Once a company is public, you can purchase shares through your online stock brokerage account.
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Advantages of a Public Company
While there are advantages to remaining a privately held entity, there are substantial benefits to becoming a publicly traded company.
- Easier Access to Capital: A company can raise significant capital to execute its business plan by simply selling more shares to the public. This capital can pay down debt, create a war chest, fuel the development of new products, or penetrate new markets. This capital can be a massive factor in accelerating growth and shortening expansion timelines.
- Increased Visibility and Credibility: Getting a company to the point of being listed on the stock exchange means it has been doing something right and can add even more to its reputation and overall profile by being publicly listed.
- Flexibility and Liquidity: Shareholders have an easy way to buy and sell shares, resulting in an easier exit strategy for those with a stake in the organization. The company also can use shares to acquire other companies as part of its growth plans. This inorganic growth strategy can make expansion much faster.
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Disadvantages of a Public Company
While there are notable and substantial advantages to becoming a public company, there are also some disadvantages. If you are thinking about taking your organization public, these are things you should consider first.
- Higher Operational Costs: The actual process of going public can be substantial once you include all the fees for underwriting, legal expenses, ongoing compliance costs, and more. On top of that, ongoing regulatory costs, like filing reports quarterly and annually, can add up.
- Loss of Control: With many shareholders, governance structures, and stakeholders, founders and co-founders can start to lose direct control of the company. When a company goes public, it can dilute the founders' and private shareholders' original ownership position. Less ownership can lead to conflicts and make it more challenging to implement strategic decisions.
- Increased Scrutiny: Public companies and those in upper management or executive positions can face much more scrutiny from investors, analysts, and regulators. This increased visibility means that even the most minor mistakes may be called out publicly, potentially pushing the stock price down.
- Short-Term Focus: Shifting the focus more heavily on stock price and market performance can engender a stressful work environment. This additional pressure can devastate morale and lead to a more myopic focus on short-term gains as opposed to more sustainable, long-term growth.
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Who Regulates Public Companies?
Public companies are regulated by many governmental agencies and independent regulatory bodies. This is to maintain as much transparency as possible and help protect investors with a fairer market.
The primary regulatory agency in the U.S. is the SEC. The SEC requires filing regular reports, such as the 10-K, 10-Q, and 8-K. Each provides a specialized and detailed look at the company’s financial situation.[2]
In addition to the SEC, public companies must follow the regulations set by the exchange’s listing of their shares. Each exchange has standards and governance requirements that companies must meet.
Smart Summary
There are thousands of publicly traded companies listed on various stock exchanges. The NYSE and Nasdaq account for most of the listing in the U.S. equities markets. You can purchase publicly available shares offered by these companies through your online stock brokerage account. Additionally, investments like mutual funds, exchange-traded funds, or target-date funds also hold public shares in a more diversified manner. See how investing in stocks can increase your portfolio and help you achieve your financial goals by consulting with a financial advisor.
Frequently Asked Questions
By setting up an online stock brokerage account, you can invest in individual stocks or other investments once you have funded your account. (Check out Smart Money’s picks for the best online stock brokerage accounts).
Some online brokerage platforms offer new sign-up promotions and other advantages. There are a variety of super excellent platforms that can help you get started investing today. Here are our picks for the best online stock brokerage accounts.
There are many different investment strategies for beginner investors to boost your holdings. Check out strategies like dollar-cost averaging as well as active or passive investing.
Your financial goals guide how much you should invest in stocks. A diversified portfolio can increase your net worth over time, and financial experts recommend holding different percentages of your portfolio in stocks based on your age, risk appetite, and retirement goals.
(1) U.S. Securities and Exchange Commission. Investor Bulletin: Investing in an IPO. Last Assessed January 15, 2025.
(2) U.S. Securities and Exchange Commission. Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Last Assessed January 15, 2025.
