Publicly traded companies are companies with shares which can be purchased or sold by any member of the public. This is in contrast with private companies, which do not offer shares on the open market. When companies are established, they are usually private. As they grow, they may opt to hold an initial public offering (IPO) to start selling shares to the public and become publicly traded companies. There are advantages and disadvantages to going public which must be weighed when preparing to sell stock to members of the public.
If a company wants to become a public company, it needs to make a number of financial filings. These filings are intended to protect investors by obliging companies to make their financial information available to the public so that people have that information when they make decisions about which stocks to buy and at what price. This information is released in a document called a prospectus which also provides background information about the company, the products it offers, and the projections for its financial future.
If a company appears sound after the prospectus is reviewed, government regulators allow it to start selling shares on the open market. Many publicly traded companies opt to list with an exchange. While on the exchange, their shares can be bought and sold on the floor of the exchange between members and brokers. The company must continue to file financial disclosures to remain listed on the exchange. Falsification or misstatement of financial information can be grounds for delisting and legal penalties.
Publicly traded companies often make an IPO to raise funds for expansion, investment, and other needs. Once a company goes public, however, it must disclose financial information even if this information could be used against it by competitors. It is also at risk of being taken over if it offers too many shares, allowing people an opportunity to buy a controlling interest. Publicly traded companies are also subject to more financial scrutiny, which may not be to the taste of every company.
It is possible to obtain shares in a private company, but only by consent from the owners. Private companies usually have relatively few shareholders, all of whom hold large interests in the company. For example, a family company would have the family members as shareholders. By contrast, publicly traded companies have numerous shareholders who only hold very small stakes in the company.