General > Investing Public versus Private Companies and the IPO

Team PV

“So what’s the difference between a public and private company? I assume it’s not just how the company’s Facebook profile looks to non-friends?”

Untag me, please. If you own stocks, you own public companies. A company “goes public” via the IPO process, which puts it on a stock exchange and allows the average Joe Investor the chance to buy a piece of the company. Public companies are required to post their quarterly earnings with the Securities and Exchange Commission (SEC), so you know what you’re getting into when you buy shares of the company. As a shareholder, you also have the opportunity to vote on corporate structure changes or the company’s board of directors, and collect dividends.

Privately held companies are owned by its founders, managers, or by private investors. They can’t tap the public in an IPO so they don’t need to keep shareholders happy the way a public company would, nor do they answer to the SEC- both a pro and a con for potential investors. They also aren’t required to reveal their financials, so if you’re nervous about the lack of transparency here, stick to public companies.  You might think that because they haven’t gone public, many private companies are small companies. Not always the case. Some household names you might’ve heard of: Mars, Enterprise Rent-a-Car, Hallmark Cards, and Toys “R” Us are all private companies.

Back to that IPO business. An Initial Public Offering is when a company hangs an “Open for Business!” sign on its front door. Let’s say you run a company called… Pear. And you’re in the business of black turtlenecks. Your company is doing really well: your turtlenecks are featured on Refinery 29, and more venture capital is pouring into the company. You know you need more money to expand the business, especially if you want to make round eyeglass frames to go with your signature turtlenecks, so you do an IPO.

In an IPO, you sell the first shares of your company to the public. With an investment bank as your underwriter, Pear as a company is valued, a prospectus for investors and the SEC prepped, the type of issued stock decided, and then the stock itself is valued. You also choose how much of your brand spankin’ new stock you release to the public, and how much you’ll reserve for the financial equivalent of a rainy day. IPOs can be a great way to get in with a young company with lots of growth potential. The downside, or course, is that there’s never a guarantee this new company will be the next Facebook. When it comes to the IPO price, know that it’s the best price for the underwriters and the company, not necessarily for you. Invest at your own risk, or if you really like Pear’s black turtlenecks.

 

Photo: GotCredit

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