Every single share that is offered for sale on the stock exchange is issued by a publicly traded company. In order to raise funds, a company often issues an initial public offering (IPO) of its shares so it can get publicly listed. The corporation and investors both have a strong way of generating money through the IPO process.
Publicly traded companies are a key component of the country’s economy, allowing anyone to own shares and earn a profit.
A publicly traded company is a corporation whose shareholders have a claim to part of the company’s assets and profits. It is also called a public company. Shares of a public company can be traded freely on stock exchanges or over-the-counter (OTC) marketplaces, distributing ownership among shareholders in the larger public.
Advantages of a publicly traded company
Fund raising through stock sales: A publicly traded company enjoys the benefit of raising capital through the public offering of the company’s shares. Raising a significant amount of funds to support operations and new product offerings before going public is challenging and sometimes requires loans. The only options for a private firm to raise capital are through loans, reinvesting earnings, or securing investments from a small group of wealthy individuals, who might not be capable to provide the company with sufficient funds to meet its needs.
Public companies can raise capital in both primary and secondary markets by making their shares available for purchase by the public at large. Public corporations can engage in capital-intensive activities because they can raise significant amounts of funds on public markets. In exchange, dividend payments and stock capital gains are distributed to the owners.
Financial data accessibility: Financial statements, which must be filed with the securities regulators on a quarterly and annual basis, are necessary for public corporations. Shareholders, financial journalists, potential investors and financial analysts can get more information about the firm due to the above requirement.
Analysts are able to better assess the company’s valuation due to the accessibility of financial data about the company’s operations. On the other hand, there is no legal obligation for private enterprises to disclose their financial reports to the public. In order to inform both current and prospective shareholders about their financial performance and the company’s future, public corporations have an obligation to comply with disclosure regulations.
Disadvantages of a publicly traded company
Greater monitoring by the government and regulators: Public corporations are susceptible to higher government, regulatory and public scrutiny. Government agencies have established a number of mandatory reporting obligations that the company must adhere to.
Adherence to international accounting norms strictly: Additionally, they have to create their financial reports using international financial reporting standards. Important records pertaining to the company’s business operations are also available to shareholders.
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How to become a publicly traded company?
Selling stocks to the general public through an IPO is the primary procedure for making a firm become a publicly traded company. A competent investment bank must be hired by the company issuing the stock to underwrite the tender because going through the IPO process is a difficult process. The competence of the investment bank will play a major role in the IPO’s success. Thus when selecting an underwriter, the issuer should take distribution, industry experience and reputation into account.
Key steps involved when issuing an IPO
Due diligence: To ascertain if the firm’s business model can be sustained, due diligence must be carried out by the investment bank, the issuing company and other consultants. In order to evaluate possible opportunities and risks, due diligence focuses on the financial, legal, commercial, operational and tax areas. Investors are assured by the due diligence investigation that the issuer’s registration statement is correct and that it is supported by genuine market and competition analysis.
Prospectus: The lead bank prepares the prospectus, which contains details about the company’s past financial achievements as well as projected future performance. There may be two phases to the prospectus’s release. To ascertain if the public would find the company’s stocks suitable, a preliminary prospectus is sometimes used. The quantity and cost of the shares to be issued are not disclosed.
Along with other necessary documents, the final prospectus is filed with the securities regulators and contains all the information on the offering, including the amount of stocks or certificates that will be distributed to investors. Investors can make an informed decision by reviewing the prospectus, which provides them with information about the company and the transaction.
Regulatory approval: The underwriter and the issuing company agree on the issuance date once the securities regulator is satisfied that the company is in compliance with all IPO requirements. Before the effective day of the issuance, the two parties must also agree on the offer price. IPOs are often underpriced in order to ensure that every share issued to the public is either sold out or that the offer is oversubscribed.
Special considerations
In certain situations, a publicly traded firm could decide it is no longer in its best interests to comply with the prescribed business model for public companies. There are several reasons why a public company may decide to go private. It may want to forgo the costly and time-consuming regulatory obligations that come with being a publicly traded company, or it could opt to free up funds for capital projects, employee pension plans, and research and development (R&D).
When a company goes private, a ‘take private’ transaction is required. All of the outstanding shares of the publicly traded company are either bought or acquired by a private equity firm or a group of private equity firms. Occasionally, in order to help fund the deal, the private equity company might have to get extra funding from an investment bank or another kind of lender.
Following the completion of the acquisition of all outstanding shares, the firm will be delisted from the stock markets with which it is affiliated and resume its private activities.
Impact of public trading on businesses and economy
Stock price fluctuations may have a good or negative effect on the economy overall by impacting a number of economic factors, including company and customer trust. Below are some points:
Changes in the stock market
The stock market’s volatility is a result of changes in each stock’s price. The volatility of stock values, whether they are rising or falling, may affect consumers and businesses in both good and negative ways. A bull market or an increase in stock prices boosts people’s confidence in the economy as a whole. As people’s confidence in the market grows, so does their spending. Additionally, more investors are joining the market, which contributes to the country’s increased economic growth.
Consumption as an activity of wealth
People become more confidence in the state of the market and boost their investment when stock prices rise and there is a bull market. They frequently spend more money on costly things like automobiles and homes. This phenomenon, also referred to as the ‘wealth effect,’ describes how a shift in an individual’s income influences their spending patterns and ultimately spurs economic expansion.
Effect on investment in business
Businesses are inclined to invest more money when stock prices are high due to the high market values. Since the market is optimistic and it is an ideal time to generate funds through the sale of shares, many firms conduct initial public offerings (IPOs) during this period. A bull market also sees an increase in mergers and acquisitions, as corporations may utilize the value of their shares to acquire other businesses. More investment leads to faster economic expansion.
Some largest publicly traded companies
Below are some of largest publicly traded companies:
- Apple
- Microsoft
- Nvidia
- Alphabet (Google)
- Amazon
- Saudi Aramco
- Meta Platforms (Facebook)
- Berkshire Hathaway
- Eli Lilly
Frequently Asked Questions (FAQs)
What defines a publicly traded company?
A publicly traded company, sometimes referred to as a public company, is a business in which the ownership of the firm is shared freely among the general public through stock shares.
How does a company become publicly traded?
A company goes public through an initial public offering (IPO). An IPO is the process by which a private firm sells its shares to the general public for the first time. After that, the company is listed on a stock exchange where investors are able to buy and sell its shares.
What are the benefits of being a publicly traded company?
Raising capital through the public issuance of the company’s shares is one benefit enjoyed by publicly traded companies. Obtaining substantial sums of funds to support operations and new product offerings before going public is challenging and sometimes requires loans. Public companies can raise capital in both primary and secondary markets by making their shares available for purchase by the general public. Public corporations can engage in capital-intensive operations as they can raise substantial sums of money in public markets.
What are the drawbacks of going public?
Taking a company public does increase revenue, but there are major disadvantages as well. These include the drawn-out IPO procedure, making sure the company complies with stringent regulations, surrendering all ownership and control, and facing scrutiny from the general public and investors.
What are some examples of publicly traded companies in the UAE?
It includes Abu Dhabi Commercial Bank, First Abu Dhabi Bank, Emirates NBD, Emaar Properties, among others
Bottom line
If you have invested in a mutual fund or a pension plan, you most likely hold shares in a publicly traded firm, since many funds and plans use this kind of investment. Investing directly in a firm of that nature is also an option. Regardless of the situation, you and the other shareholders own a percentage of the company in proportion to the quantity of stock you have bought.
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