Did you know that you interact with the public and private sectors every day? From the groceries we buy and the roads we drive to the jobs we clock into, many aspects of our lives are directly tied to public and private companies—whether we know it or not. In this article, we zoom in to look at the basics of each financial market and explain the key differences between the public and private sectors.
What is the difference between the public and private markets?
The public markets and the private markets both sit within the larger financial landscape, also known as the capital markets. There are some core differences between the types of companies and investors that participate in each though. Public companies are publicly traded on the stock market and can be invested in by members of the general public, like you and me. The private markets are funded through institutional investors—companies or organizations that invests money on behalf of clients or members.
What are the public markets and traditional asset classes?
In the public markets, companies sell shares to the general public. In other words, you—yes you—are the investor. Once shares are acquired, an individual can buy, sell, or trade those shares on a stock exchange. When someone invests in the stock market, whether individually or through a program like an employee-sponsored 401(k), they own a small portion of the public companies they’ve invested in. That small portion is called a share. Stocks and bonds are examples of traditional asset classes and are considered to be mainstream investments.
Often larger and more mature than private upstarts, public companies are heavily regulated by governmental organizations, including the Securities Exchange Commission, the Financial Industry Regulatory Authority (FINRA), and others. To ensure these companies remain accountable to shareholders, public companies are required to disclose information about their performance, which makes it easy to see their financials, revenue, and more.
What are the key characteristics of the public market?
- Members of the general public can invest in the public market
- Public companies are heavily regulated
- Public companies must report on performance
- It’s easy to find information about publicly traded companies
What are the private markets and alternative asset classes?
In the private markets, companies—ones that aren’t publicly traded—provide pro investors with an opportunity to acquire equity in exchange for providing capital. 💰
In addition to their equity stake, private market investors will often get a seat at the table for key conversations and decision-making related to the company. In this exchange, the company gets an influx of funding to help fuel growth, as well as access to mentorship and expert feedback to help achieve their scalability goals.
Private market investors include venture capital firms, which invest in young companies—also called startups. They include private equity firms, too, which invest in more established companies. With the exception of extremely wealthy individuals, like angel investors, the general public cannot invest in the private markets.
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Are all private companies backed by investors?
It’s important to note that not all private companies are backed by investors. A small business that’s family or individually owned, for example, is unlikely to be backed by a VC or PE investors. However, those companies would still be considered “private” because they’re not traded on a public stock exchange. In fact, most private companies fall into this category.
What are the key characteristics of the private markets?
- Only professional investors (or very wealthy individuals) can invest in this market
- Private companies are less heavily regulated
- Private companies do not have to report on performance
- It’s hard to find information about them
How do private companies become public companies?
When private companies list themselves on the public stock exchange, AKA when they choose to move from the private markets into the public markets, it’s known as “going public.” Companies may go public to unlock new growth opportunities or secure capital from a different pool of investors. When this happens, the private investors who provided the company with capital, mentorship, and/or their expertise realize a profit on their investment.
Private companies can go public in a number of ways, but the most traditional route is through an initial public offering, or IPO. Relatedly, as of Q3 2023, a prolonged liquidity crunch and all-but-shuttered IPO window have stifled venture capital across the US. For more on that, check out our Q3 2023 Venture Monitor Report webinar. In recent years, more companies have chosen alternative exits, like direct listings or special purpose acquisition companies (SPACs).
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Public vs. private markets: Key characteristics at a glance
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