Publicly Traded Company: What it is, How It Works and Examples

What are publicly traded companies?

Publicly traded companies meaning- a type of business entity that sells shares to the general public through a stock exchange. This means that anyone can purchase shares of the company, becoming part-owner and entitled to a portion of its profits, typically distributed through dividends. Publicly traded companies are listed on major exchanges like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE).

These businesses are subject to stricter regulations compared to private firms, including disclosure of financial information and adherence to corporate governance standards. The aim is to protect shareholders and ensure transparency. By being publicly listed, a company gains access to capital from individual and institutional investors, which can be used to fund expansion, innovation, or debt repayment. Examples of publicly traded companies in India include Reliance Industries, Tata Motors, and Infosys.

How do publicly traded companies work?

Publicly traded companies operate under the regulations set by government bodies and stock exchanges. Once listed, the company’s shares are available for purchase by any investor. These shares are traded on stock exchanges where their price fluctuates based on demand, supply, and market conditions. Shareholders, depending on the number of shares they hold, own a portion of the company. They can participate in key decisions through voting rights, especially during Annual General Meetings (AGMs).

These companies also have to comply with legal requirements, such as regular financial reporting and adhering to corporate governance norms. Public companies are often required to publish quarterly earnings reports to provide transparency to their shareholders. The management of publicly traded companies is accountable to its shareholders, ensuring decisions are made in the best interests of the company and its investors.

How is capital raised for a publicly traded company?

• Initial Public Offering (IPO): The company raises capital by offering shares to the public for the first time through an IPO.

• Secondary stock offerings: A company can issue more shares even after the IPO to raise additional funds.

• Debt financing: Public companies can issue bonds or debentures to borrow money from investors.

• Reinvested profits: Retained earnings can be used for expansion instead of distributing them as dividends to shareholders.

• Private placements: Shares can be sold directly to institutional investors or high-net-worth individuals to raise capital.

• Rights issue: A company can offer additional shares to existing shareholders at a discount, generating more funds.

• Venture capitalists or private equity: In some cases, public companies may still receive investments from private investors.

Examples of publicly traded company

Advantages & disadvantages of publicly traded company

Advantages

• Access to capital: Publicly traded companies can raise large amounts of capital through share offerings, enabling growth and expansion.

• Liquidity: Investors can easily buy or sell shares on the stock exchange, providing liquidity to shareholders.

• Brand reputation: Being publicly traded enhances a company’s credibility and visibility in the market.

• Increased shareholder base: Publicly traded companies can attract a wide range of investors, diversifying ownership.

Disadvantages

• Regulatory requirements: Companies are subject to strict rules, including public disclosures and financial reporting.

• Pressure from shareholders: Public companies often face pressure to meet quarterly earnings targets, which can affect long-term strategies.

• Loss of control: With shareholders involved, the original owners may lose some control over the company’s decisions.

• Costs: There are significant costs involved in maintaining public status, including listing fees and compliance costs.

Is an exchange-traded fund (ETF) a publicly traded company?

An Exchange-Traded Fund (ETF) is not the same as a publicly traded company, but it is a financial instrument traded on stock exchanges like shares of a company. An ETF holds a basket of assets such as stocks, bonds, or commodities, allowing investors to gain exposure to a variety of securities through one single investment. Unlike a publicly traded company, an ETF doesn’t represent ownership in a business but rather in the assets it holds. Investors can buy and sell ETF units on stock exchanges just like shares of a company. ETFs are managed by asset management firms, and their prices fluctuate throughout the trading day based on the underlying assets' value.

Difference between private and public company

• Ownership: A public limited company sells its shares to the general public, whereas a private limited company is owned by private investors or founders.

• Capital raising: Public companies raise funds through the stock market, while private companies rely on private equity or venture capital.

• Regulations: Public companies face stricter regulations and reporting requirements compared to private firms.

• Number of shareholders: Public companies have a large number of shareholders, while private companies usually have fewer.

• Transparency: Public companies must disclose financial information to the public, whereas private companies do not.

The difference between a private and public company also lies in their ability to raise capital. A public limited company offers more liquidity but faces increased scrutiny.

Conclusion

Publicly traded companies offer immense opportunities for raising capital, but they also come with strict regulations and increased scrutiny. From the ability to issue shares to the public, these companies gain access to a broad investor base but must also manage shareholder expectations and regulatory compliance. Despite the challenges, publicly traded companies are a key part of the financial landscape, contributing significantly to economic growth. Whether opting for an IPO or seeking further capital through other financial instruments, publicly traded companies continue to drive innovation and expansion. Business Loan from Bajaj Finance, also remain available option for these companies to further their financial ambitions.