What it means
When a business first sells shares to the public, usually in an initial public offering, it becomes publicly traded. After that, its shares change hands between investors every day, and the company's total value, called market capitalisation, moves with the share price.
Market capitalisation is the share price multiplied by the number of shares in issue. Listing offers real advantages.
The company can raise large amounts of money by issuing new shares, shares can be used as currency for acquisitions and employee incentives, and early investors have a route to sell. Being listed can also raise a company's profile with customers and lenders, who often view a company that publishes audited accounts as more transparent.
The costs and obligations are significant. Public companies must publish audited accounts, report results regularly, and disclose important events promptly, and directors face stricter rules on governance and conduct.
Listing fees, legal costs and investor relations also add up. Public companies are accountable to shareholders, who elect the board and vote on major matters.
Some of the shareholders are large institutions such as pension funds, which pay close attention to quarterly performance. This can push managers to focus on short-term results, a criticism often made of the public company model.
Not every share is available for trading. The free float is the portion held by ordinary investors rather than by founders, governments or strategic holders, and it affects how easily the shares can be bought and sold.
A small free float can make the share price more volatile. A company can also leave the market.
In a take-private deal, an investor buys all the shares and delists the company, which then becomes private and no longer has to publish detailed public reports.
In practice
Real-world examples
Example 1
A software company completes an initial public offering and raises $200,000,000 by selling new shares. It uses the money to expand into new markets and to repay some of its debt.
Example 2
A listed retailer announces a profit warning. Its share price falls 15% on the day because investors immediately adjust their expectations. The rule requiring prompt disclosure means all investors receive the news at the same time, which keeps the market fair. The chief executive holds a call the same morning to take questions from analysts.
Example 3
A family business with annual sales of $400,000,000 decides to stay private. The owners value control and confidentiality more than the access to capital that listing would bring. They fund growth from retained profit and bank borrowing, and they pay a small number of family shareholders a steady dividend.
Think of it
Think of a private company like a private house where only the family knows what goes on inside. A publicly traded company is like a transparent glass house in a public park, where everyone can see the furniture inside, buy a small brick of the building, and check the accounts whenever they like.
Formula
Calculation
Market capitalisation = share price x shares outstanding; free float market value = share price x freely tradable shares
Suppose a company has 40,000,000 shares outstanding trading at $25. Its market capitalisation is 40,000,000 x 25 = $1,000,000,000. If founders and a strategic partner hold 15,000,000 shares that are not freely traded, the free float is 25,000,000 shares, which is 62.5% of the total, and the free float market value is 25,000,000 x 25 = $625,000,000.Case study
Seen in the real world
Brightline Components is an illustrative, fictional manufacturer that listed on a stock exchange after 30 years as a family firm. The listing raised $120,000,000, which the company used to build a second factory and to buy out two minority owners.
The finance team had to prepare for quarterly reporting, an audit committee and an investor relations programme. In the first year, the chief financial officer reported that compliance costs were about $1,500,000, more than the family had expected. The illustrative board concluded that the access to capital and the higher profile were worth the cost, but warned that managers needed to resist focusing only on the next quarter.
Three years after listing, Brightline reported its first full year of profit growth above the market's expectations. The share price rose, which let the company use shares to pay for a small acquisition. The illustrative board noted that the discipline of public reporting had also improved the company's internal controls and planning.
Watch out
Common mistakes
- Assuming that a listed company is automatically a safe or successful one, when listing says nothing about quality.
- Ignoring the free float and treating all shares as equally easy to trade.
- Underestimating the ongoing cost and management time that reporting and compliance require.
Questions
People also ask
Is a publicly traded company the same as a public limited company?
Not always, since a public limited company is a legal form that may or may not have its shares listed on an exchange.
Who owns a publicly traded company?
Its shareholders, which may include individual investors, funds, employees and founders.
Can a publicly traded company become private again?
Yes, through a buyout in which an investor purchases the shares and the company delists.