In simple term public company is company whose shares are publicly traded on one or more stock exchanges or over the counter market (OTC) and that ownership is dispersed among the many investors. History of public market dates back in early modern period when Dutch helped lay foundation of modern financial system. Publicly traded companies usually have many investors while privately held companies had fewer, but company with big number of investor doesn’t have to be public company. Securities and Exchange Commission (SEC) states that every company with more than 500 investors and more than $10 million in assets must register with SEC and adhere to its regulations. Most public companies where private and after that they meet requirements to become publicly traded company mainly because it brings many advantages.
Public companies are able to raise capital through the sale of stock in a way shares become company’s currency which is then traded on the market. Before it was difficult to obtain larger sums of capital. It was only possible through wealthy investors and banks willing to take the risk. Investors can profit from stocks dividends – payment made by corporation to its shareholders, usually as a distribution of profits. Once that company goes public it can generate new revenue through sale of new shares (secondary offering).
When a company is public it is under a lot of scrutiny, having to meet all the needed requirements and regulations. Those requirements include disclosure of financial statements and annual reports that truthfully represent the state of the company. SEC requires hat public companies report to their major shareholders each year, including institutional shareholders, company’s officials who own shares and any other investors that own more than 5% of shares. Many stock exchanges require from companies to have their accounts regularly audited by an outside auditor. This requirement for audited financial is not imposed by OTC Pink. What this means is that more information is available to the public in order to help investors deciding whether to add particular stock in their portfolio.
Being a publicly traded company can have a certain amount of prestige, especially if your stock are traded on one the big exchanges like The New York Stock Exchange (NYSE) and NASDAQ. Public companies with many shareholders tend to be more recognizable to public than private companies. Initial public offerings are, especially of big companies are usually covered in media, creating a buzz of excitement and attracting more potential investors. It is a way for initial shareholders to share the risk or provide an exit strategy while increasing assets liquidity and avoiding bank debt. Giving shares of your company to the management and employees is a good incentive program that will inspire them to work harder and ensure company’s success.
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