Publicly Held Companies: Features, Advantages, and Risks
- Jojo is the CEO of a rapidly growing tech startup.
- Jojo needs significant capital to expand globally, but traditional funding sources are limited.
Going public, selling shares on a stock exchange, could be the solution.
Key Features of Publicly Held Companies
Definition
Publicly held company
Publicly held companies are businesses that sell shares to the public through stock exchanges, allowing them to raise substantial capital.
1. Shareholder Influence
- Ownership and Voting Rights: Shareholders own the company and typically have voting rights proportional to their shares.
- Decision-Making: Major decisions, such as electing the board of directors or approving mergers, require shareholder approval.
- Annual General Meetings (AGMs): Shareholders can question management and vote on key issues.
If you own 10% of a company's shares, you have 10% of the voting power.
TipShareholders with more than 50% of the shares have controlling interest, allowing them to influence company strategy.
2. Regulatory Requirements
- Transparency: Public companies must disclose financial statements, executive compensation, and strategic plans.
- Compliance: They must adhere to regulations set by governing bodies like the U.S. Securities and Exchange Commission (SEC) or the UK's Financial Conduct Authority (FCA).
- Audits: Independent audits ensure accuracy and reliability of financial reports.
- Students often confuse publicly held companies with public sector organizations.
- Publicly held companies are privately owned but trade shares publicly, while public sector organizations are government-owned.
3. Liquidity and Marketability
- Shares are Traded Publicly: Investors can buy or sell shares on stock exchanges, providing liquidity.
- Market Valuation: The company's value is determined by its market capitalization ($\text{share price} \times \text{number of shares}$).
Tesla's market capitalization surpassed Toyota's in 2020, reflecting investor confidence in its future growth.
Advantages of Being a Publicly Held Company
1. Access to Capital
- Raising Funds: Selling shares allows companies to raise significant capital for expansion, research, or debt repayment.
- Lower Cost of Capital: Public companies often secure loans at lower interest rates due to increased transparency and credibility.
Meta (formerly Facebook) raised $16 billion in its 2012 IPO, funding global expansion and acquisitions.
2. Enhanced Visibility and Credibility
- Brand Recognition: Listing on a major stock exchange boosts a company's profile.
- Trust: Transparency and regulatory compliance build investor and customer trust.
Being publicly traded can attract strategic partnerships and top talent, as stakeholders view the company as stable and reputable.
3. Liquidity for Shareholders
- Easy Share Trading: Shareholders can easily buy or sell shares, providing flexibility.
