A publicly traded company is a corporation which trades its shares and sells its bonds to members of the public, usually through a regulated stock exchange but sometimes through informal procedures known as “over the counter” (OTC) transactions. In many countries, like the United States, publicly traded companies must conform to additional regulations established and enforced by a securities regulator, like the Securities and Exchange Commission (SEC) or, in Canada, the Ontario Securities Commission (OSC). Note that a publicly traded company is sometimes referred to as a public company, but that it is entirely unrelated to government corporations, which are sometimes referred to by the confusingly similar term “publicly owned corporation.”
The opposite of a publicly traded company is a privately traded company. Privately traded companies may still have numerous shareholders, but none of those shareholders trade their stock publicly, for example on a stock market. The fact that a company is not publicly traded does not necessarily mean that it is a small or unimportant corporation – there are hundreds of multi-billion-dollar companies in America, for instance, like Koch Industries and (in Europe) Ikea – but, in general, the largest and most influential companies are also publicly traded ones.
To the corporation itself, the chief advantage of being publicly traded is that selling stock on an exchange is an excellent way to raise new capital, at the expense of diluting ownership among a much larger pool of legal owners. Most often, a new company which has experienced sizeable growth or can at least hold out the potential for sizeable growth in the future will make its first major sale of shares to the public in what is known as the initial public offering, or IPO.
However, the transition from privately to publicly held company is not without risk for the initial shareholders. They lose some control of their company, and must conform to new regulations. The value of the company is also prone to much greater (and publicly known) fluctuations in response to factors and events which may be entirely outside the control of the company’s executives and directors. Moreover, the market is not necessarily a good judge of which companies’ business plans deserve large capital investments. Public offerings of stock in what turned out to be wholly unprofitable and unsustainable Internet and technology businesses were a major factor in the dot-com bubble which broke in the late 1990s.
Once a company has gone public, it is typically possible to find its shares being openly bought and sold in special institutions called stock exchanges. Companies which are much smaller, and have not been able to maintain the standards to survive on these exchanges, can also be sold over-the-counter; such speculative and low-value companies are often referred to as “penny stocks.” In all cases, once a company is publicly held, its value is known as market capitalization or “market cap,” and is simply the number of shares times the share price at any given time. The market cap is not equivalent to the actual paper net worth of the company (assets minus liabilities), since investors are also building in their expectations about future growth or future decline. In addition, it is also not equivalent to the liquidation price which would result if all shareholders suddenly decided to sell (which would cause the price to drop), or if a single external investor decided to buy the entire company (which would cause the price to rise).
Just as it is possible to take a private company public through an initial public offering, it is also possible to take a public company private by purchasing all of the publicly traded shares and then deciding not to sell them again. A publicly traded company may have all of its shares purchased by another (private or public) company, by a single investor, or by a pool of investors and financiers. In most countries there are special procedures established by the law under which a shareholder vote can approve or reject an offer to buy all outstanding shares at a single price.