Explaining Publicly and Privately Held Companies

A privately held company is owned by its founder, management or a group of private investors. A public company has sold a portion of itself to the public through an initial public offering of the company’s stock. Shareholders can claim a part of the company’s assets and profits.

A big difference between private and public companies involves public disclosure. A public U.S. company trades on a stock exchange and must file quarterly earnings reports with the SEC that are accessible to shareholders and the public. Private companies do not trade on an exchange. They are not required to disclose their financial information or file disclosure statements with the SEC.

Public companies have the advantage of raising capital by selling stock or issuing bonds. Private companies don’t have that luxury. When they need capital, private companies turn to private funding, which can boost the cost of capital or limit expansion.

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Private Equity's Returns Are Tempered By Its Risks

Private equity funds typically raise money from large investors such as pension funds, insurance companies, and endowments to invest in businesses that are not publicly traded or that they will take off the public markets. The goal is to infuse a company with new management that will make it more efficient and hike up its earnings, thereby generating a great return for the private equity investors. While this sounds like a good way to generate a higher return, the manner in which these funds operate has attracted criticism.

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