THE BASICS #5: PRIVATE VS. PUBLIC
You can’t buy stock in just any ol’ company. Didn’t know that? Let me explain why.
Companies fall into two categories - private companies and public companies - and it all depends on who they take money from (ie. sell equity, or slices of their company cake, to).
The two sources that companies can sell equity to are - you guessed it! - private sources and public sources. The cases given in the previous videos are all examples of private sources. Other examples would be management teams (CEOs, CFOs, etc of companies), wealthy individuals, venture capital firms, and private equity funds.
When a company sells slices of equity only to private investors, it’s known as a privately owned or privately held company because 100% of its equity is owned by PRIVATE investors. For example, if you, as the cake baker, are the only owner of your business, your cake company is 100% privately owned by YOU. If, as in THE BASICS #3, you sold 20% of your business to the friend you hired, your company is still 100% privately owned, it just happens to be split 80/20 between you and your friend.
Public companies, on the other hand, have decided to sell a slice of equity to - yep - the PUBLIC. That includes individuals like you and me, investment firms, and even big banks. Public companies are also known as publicly held companies, and the slices of equity cake that they sell to the public are called shares or stock. Those shares are bought and sold on something called a stock exchange, and the first time that they’re sold to the public is known as an initial public offering (IPO). Don’t worry - I cover each of those topics in more depth in the next two videos.
Now one thing I want to make clear is that, in order to be considered a private company, 100% of a company’s equity has to be owned by private investors. That is NOT the case for a public company, though. A company switches from being private to public the minute they sell even one tiny slice to public investors. So, in theory, if 99% of a company’s equity is owned by private investors, but 1% is owned by the public, that company is a PUBLIC company.
Why would a company choose to “remain” private or “go” public? Let’s look at a simple pros and cons table:
So what does all of that mean for you? Like I said above, you can’t buy stock in some of your favorite companies. Even if they’re huge, well known enterprises, they may have chosen to stay private instead of selling equity to the public.
Which ones, you ask? Take the following quiz to find out!
QUIZ: PRIVATE OR PUBLIC?
[Answers in order: 1. Facebook = PUBLIC; 2. Popeye’s = PUBLIC; 3. Toys ‘R’ Us = PRIVATE; 4. Google = PUBLIC; 5. Jo-Ann Fabric Stores = PRIVATE; 6. Petco = PRIVATE; 7. Apple = PUBLIC; 8. GE = PUBLIC; 9. Forever 21 = PRIVATE; 10. Walt Disney = PUBLIC; 11. Ashley Furniture = PRIVATE; 12. Publix = PRIVATE; 13. Dole = PRIVATE; 14. Ford = PUBLIC; 15. Twitter = PUBLIC; 16. New Balance = PRIVATE; 17. Nike = PUBLIC; 18. Wal-Mart = PUBLIC; 19. Enterprise = PRIVATE; 20. Dell = PRIVATE]