Upbeat music plays throughout.
Narrator: A publicly traded company is a corporation whose ownership is dispersed among the general public through shares of stock which are traded on a stock exchange.
A private company, however, is owned by a relatively small number of shareholders, typically the company's founders, management, or a group of private investors, like venture capital firms. Shares aren't available to the general public and aren't traded on public exchanges.
One major difference between public and private companies is how much financial information they're required to disclose. Public companies must register with the Securities and Exchange Commission, or SEC, file quarterly earnings reports, and provide other important information to shareholders and the public. These regulations are intended to protect the public and help them make informed investing decisions.
In contrast, private companies aren't required to disclose their financial information. Until a private company exceeds a certain number of shareholders, it doesn't have to register with the SEC. As a result, company leadership has more control and is less beholden to shareholders.
An initial public offering, or IPO, is often the way private companies choose to become publicly traded. In exchange for cash, companies issue shares of stock to the public. However, a public company can decide to transform itself back into a private company if their needs change. This may involve a private equity firm buying a major portion of outstanding shares and requesting the SEC to delist the company from the exchange.
Take Dell Computers for example, whose buyout was completed in October 2013.
The company's CEO, Michael Dell, and Silver Lake Partners took the company private for $24.4 billion.
A public company may go private for many reasons, including: to limit the number of investors, create financial gain for shareholders, or reduce regulatory and reporting requirements. Because they must report results every quarter, some CEOs feel they're required to focus on short-term results rather than long-term priorities.
Although privatization has benefits, it also has risks. The new private owners may set strict business objectives with tight timelines for company management, employees may face layoffs, and possibly the most important, a private company can no longer leverage the public capital markets and therefore must rely on private funding for future growth.
Onscreen text: [Schwab logo] Own your tomorrow®
