Publicly traded. Privately held. What does it all mean? Unless you have experience with the stock exchange, you may not be very familiar with the differences between publicly traded and privately held companies. The distinction is based, primarily, on public disclosure. Companies that are privately held are not required to make public disclosures of their financial information, as their stocks are not traded on the public market. A publicly traded company operates much differently.
The definition of a “publicly traded company”
Publicly traded companies are owned by large groups of people, with each owner having a certain number of shares in the company. Any profits the company makes are divided among all of the shareholders and paid to them as dividends.
Investing in publicly traded companies
Publicly traded companies that provide a service or a product to consumers, receive income from that service or the sale of that product. The difference between the income the company receives and its overall operating expenses is known as the profit margin. When a publicly traded company is operating the way it should, the profit margin can be increased by minimizing expenses and maximizing income.
The larger the profit margin becomes for a particular business, the more valuable its shares become in the public market. Understandably, shareholders are always more likely to own shares in a company that is successful, as demonstrated by its profit margin.
Why is corporate growth important for publicly traded companies?
Corporate growth is tied to profit, even though growth does not always result in an increase in profit. But, in the corporate world, it is understood that the two are closely linked. For this reason, most shareholders expect that a company’s board of directors will enforce a growth-based policy in order to maximize profits.
The social responsibility of publicly traded companies
Historically, publicly traded companies were not very keen on the idea of social responsibility. Now, though, it is widely recognized that corporations have a huge impact on, not only society, but on the natural world as well. The result is that many shareholders expect, and even demand, that their company takes action, and make business decisions, that are motivated, at least in part, by social conscience and not just profit. For instance, there has been an increase in business investments that focus on energy efficiency, as well as programs whose purpose is to help the disadvantaged.
Stability is preferred over risk
Investment typically comes with some amount of risk. However, most shareholders would prefer to avoid risk as much as possible. A publicly traded company that maintains a stable rate of growth and profit will often be more appealing to a potential investor. On the other hand, a business that is taking off one year, but crashes the next, is often not seen as a safe or attractive investment. In reality, a small rate of profit and grown that is stable, will be preferred by most investors, as it allows shareholders to plan an economic forecast much easier.
If you have questions regarding publicly traded companies, or any other business planning needs, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.