[This article was written by Hannah Whittenly.]
As an investor, it is important to understand that there are two types of corporate structures. Some companies are privately held, while others are public entities. Understanding the difference between these two structures, and how they affect the ability to predict the riskiness of an investment, can help you make better investment decisions in the future.
What Is a Private Company?
The main difference between private and public companies is how they obtain capital for startup and any funds that they may need in the future. A private company seeks funding through banks, private lenders, and other private sources of capital. It is possible for a private company to issue stock and have shareholders, but the stocks are not traded on the public markets.
Why Would a Business Want to Be Private?
One of the biggest differences between public and private companies is how they disclose information to the public. Many privately held companies do so because they do not wish to be controlled by entities outside of their organization. Privately held companies do not have the same disclosure requirements as public entities.
What Is a Public Company?
A public company issues stocks on the open market that can be traded among investors. Their value may go up or down depending on the value that the public places on their company. An Initial Public Offering (IPO) gives the public the opportunity to own shares, or a portion of the company. They may use this offering to raise funds for a startup, or for the expansion of their company.
Why Would a Business Want to Be Public?
When companies go public, they give up some of their power and decisions to a board of directors. However, they gain the benefit of having more readily available capital in the future.
According to creditriskmonitor.com, there is more to risk assessment than financial ratios and profit/loss statements. It requires real-time data on the decisions that people are making as they are making them. A public company risk tool that takes real-time crowd sourced data into account is able to predict an impending bankruptcy better than one that uses historical financial data alone.
As an investor, it is important to have as much information about the company as possible. Historical trends may not necessarily predict the future. That is why the incorporation of real-time data can give you an edge that can reap take profits in the end.
Hannah Whittenly is a freelance writer and mother of two from Sacramento, CA. She enjoys kayaking and reading books by the lake.