Public vs. private sector: What's the difference?

You interact with the public and private sectors every day. From buying groceries to driving on the highway, you use services and products from public and private companies. 

In this article, we break down the basics of each financial market and explain what you need to know.

What is the difference between the public and private markets?

The private and public markets both make up the larger financial landscape, however there are big differences in the types of companies and investors that participate in each. Private companies exist in the private markets and are funded through institutional investors, whereas public companies are publicly traded on the stock market and can be invested in by the general public.

We’ll go more into these differences below, as well as share additional resources on the financial markets.

Key characteristics of the public markets and traditional asset classes

In the public markets, companies sell shares to the general population, who can then buy, sell or trade those shares on a stock exchange. Stocks and bonds are examples of traditional asset classes and are considered to be mainstream investments. When someone invests in the stock market—whether individually or through a program like a 401(k)—they own a small portion (a share) of the public companies they’ve invested in.  

Often larger and more mature, public companies are heavily regulated by governmental organizations like the Securities Exchange Commission. To ensure they remain accountable to shareholders, these companies are also 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? 

• Individuals can invest in this market
• Public companies are heavily regulated 
• Public companies must report on performance 
• It’s easy to find information about them  

Explore more on the public markets

Key characteristics of the private markets and alternative asset classes

The term alternative asset classes refers to alternative investments and includes venture capital, private equity, real estate and hedge funds. These asset classes make up the private markets.

In the private markets, on the other hand, fast-growing companies that are not publicly traded give professional investors equity in exchange for the funding and mentoring they need to grow. These investors include venture capital firms, which invest in young companies (startups), and private equity firms, which invest in more established companies. With the exception of extremely wealthy individuals, the general public cannot invest in this space.

Because private companies do not answer to public shareholders, they are less heavily regulated. They do not have to disclose earnings reports or submit financial statements for auditing, which makes it hard for outsiders to find reliable, accurate information about them. 

It’s important to note that not all private companies are backed by investors. A family or individually-owned small business, for example, is unlikely to be backed by a venture capitalist or private equity firm, but it’s still private—i.e., 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

Explore more on the private markets

How do private companies become public companies?

When private companies list themselves on the public stock exchange, it’s known as “going public.” Private companies can go public in a number of ways, with the traditional route being an Initial Public Offering (IPO). In recent years, more companies have chosen alternative exits such as direct listings or special purpose acquisition companies (SPACs).

Companies choose to go public to unlock new growth and capital from a different pool of investors. It also gives private investors a chance to realize a profit on their investment.