Companies can be either public or private. Public companies have shares that are publicly traded, which means anyone can purchase shares of the company. When a company is publicly traded, it can raise additional capital by issuing more shares, but it also dilutes ownership, brings on additional filing responsibilities and subjects the company to public pressures.
When a company is publicly held, the company can raise capital by issuing shares. This money does not have to be repaid like loans from a bank or company bonds. For example, if a company wants to expand, it can sell additional shares. In addition, the company can use shares as a means to compensate its employees. By offering these shares, the company can give an additional incentive for employees to help the company succeed because the stock options will be worth more the better the company does.
When a company is publicly traded, the company is required by the Securities and Exchange Commission to release certain financial information during the year so that investors can know what they are purchasing. Especially for smaller public companies, this can impose a significant burden.
When a company sells shares, it is actually selling part of the company to the general public so it is no longer completely owned by its founders. For example, if a company sells shares and the original owner only keeps a 30 percent stake in the company, it would be possible for another person or group to gain a 51 percent stake in the company by buying shares, which would give the investor(s) a controlling interest in the company.
When a company is publicly traded, investors can pressure the company to produce short-term results so they can make money. However, the short-term results investors seeks may not be in the best long-term interest of the company. Temporary solutions may make the company look good and raise the price of the stock, but result in policies that lead to the eventual demise of the company.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."