Investor Jargon: Private and Public Companies
A lot of investing-related language can be straight-up confusing. This can make ownership seem scary and much more complex than it actually is. We’d rather ownership be approachable, so we’re breaking down some of the common terms you might see or hear.
Regardless of industry, all companies can be described one of two ways: private or public.
Private companies are owned—you guessed it—privately. While they may issue shares of stock, they aren’t bought and sold on stock exchanges. Instead, shareholders tend to be people like founders, friends and family, early employees, and professional investors like venture capitalists.
A lot of people assume that all private companies are small and inconsequential, but that can be a misconception. Deloitte, Albertsons, Petsmart, Mars, and Bloomberg, for example, are all fairly large—and they’re privately held. The size of the company doesn’t determine whether it’s public or private.
Public companies, on the other hand, are those whose shareholders include the general public. They often have thousands of shareholders, and each of those shareholders owns equity in the company.
To help protect investors, the Securities and Exchange Commission (SEC) enforces specific rules and regulations that apply to U.S. publicly traded companies.
Which is better?
One isn’t necessarily better than the other.
Public companies, for instance often find it easier to raise capital by selling shares of stock or bonds, but they’re also subject to the expense of adhering to stronger regulatory requirements. For instance, they’re required to file quarterly financial reports with the SEC that are then made available to shareholders and the public. Private companies can’t tap into the stock market, which can make it more difficult to raise capital, but they can maintain greater control over strategy and operations.
There are pros and cons either way, and whether a company stays private or chooses to go public usually depends on what they’re trying to achieve as an organization.
If you want to read more about why and how private companies become public companies, check out our post on IPOs.