Every company in the world falls into one of two categories: public or private. But only public companies’ shares are available to buy and sell on stock exchanges. Get an in-depth look at differences between the two types of company.
What is a private company?
A private company is one that’s held under private ownership. It can issue shares and have shareholders, but the stock does not trade publicly and is not available to retail investors.
Private companies tend to have a far smaller number of shareholders, who have a larger influence over the company’s running. They can have different structures depending on the country they’re incorporated in.
There are a few types of private company, such as:
- Sole proprietorships – where one individual owns and manages the company, bearing personal responsibility for assets, liabilities and obligations
- Partnerships – where two or more individuals own and manage the company. All partners have a responsibility for assets, liabilities and obligations
- Corporations – can be for-profit and not-for-profit organisations that are separate from their owners. They are owned by shareholders and investors who provide capital to the business, and are independently run by a board of directors. The company, not the individuals, are responsible for assets, liabilities and obligations
What is a public company?
A public company is an entity that’s stock is traded on a public exchange, so shares can be bought by investors in an open marketplace. Most public companies start their lives as private companies, who then go public as a way of raising capital to fund projects and operations.
The process of becoming a public company traditionally occurs by way of an initial public offering (IPO), in which a company issues new shares to the market. But in recent years direct listings – which only sell existing shares – and SPACs have become popular too.
It is also possible for a public company to delist and go private, although it’s not common. The process is usually that a private equity firm buys a major portion of outstanding shares and requests that the remainder be delisted from an exchange. Shareholders will agree to sell their shares at a premium over the current market price, to compensate them for giving up their ownership and any future profits.
Private vs public companies: 3 key differences
Private and public companies are very distinct entities. But their differences can be summed up into three general points:
- How they raise capital and create liquidity
- How they’re regulated
- The size and valuation of the firm
1. Capital raising and liquidity
Private capitals raise funds through private investors and venture capitalists, whereas public companies can tap into a broader pool of funds through equity and debt markets.
As we’ve seen, companies go public and raise funds through a process called an IPO. This is where new shares are issued to retail investors. Once an IPO is complete, investors can buy and sell shares between themselves in what is known as the secondary market.
Being bought and sold on public exchanges provides a company with liquidity. It means that its shares can be exchanged for cash quickly and easily – for the most part. There are some shares that will be illiquid due to lack of demand, but broadly speaking, it’s easier to buy and sell public shares than private ones.
Public companies can also tap into the bond market, or debt market, to raise capital. Bonds are a form of loan that a company can take from investors. They have to repay the loan – usually with interest – but they don’t have to issue any shares.
Private companies cannot use equity and debt markets to raise capital and fund growth. But they can sell a limited number of shares without going through an exchange, in what are known as funding rounds. These occur when companies ask equity firms and sometimes individuals – through crowdfunding campaigns – for cash in exchange for equity. They can also borrow money from banks and venture capitalists.
A private company doesn’t normally have to follow any regulations until it reaches a certain size – in the US, that’s a value of $10 million and more than 500 shareholders. Whereas public companies have far stricter regulations about what information they disclose and how frequently they have to do it.
Public companies are typically required to file earnings reports – the frequency of which can vary depending on region – with their regulatory body. For example, in the US, public companies have to disclose their earnings quarterly to the Securities and Exchange commission.
In the UK, public companies are not required to report quarterly to the Financial Conduct Authority. The majority report half year and full year results, but some do choose to report quarterly to ensure analyst coverage.
3. Size and valuation
There’s a misconception that public companies are larger and more valuable than private ones. There are a lot of large companies that are still privately held, such as Mars, Fidelity Investments and EG Group.
The difference is that it’s just much easier for analysts to value public companies than private ones, due to the wealth of information in the public domain.
Earnings reports contain figures on how much money a business makes, how much debt they have and how they operate. This makes it easier to see what the intrinsic value is and judge it against what a company’s share are currently trading at – this is known as price-to-earnings. It provides key insights into how a company’s value might move in the future, as traders can see whether its over- or undervalued.
Learn about using the price-to-earnings ratio
Private companies don’t have to disclose their cash flow and other financial ratios to the public, which makes it nearly impossible to accurately judge their size and value. And the only time analysts really get a glimpse into the valuation of a company is when (or rather if) the firm holds a funding round, after which the equivalent of the company’s market capitalisation is often disclosed.
Learn more about how to use financial ratios
How to trade shares of public companies with FOREX.com
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