Investing Basics for Beginners Installment #4: Why Invest in Public Companies?

[Read Installment #3 here. Read Installment # 5 here]

You probably already invest in public companies If you have a:

• Annuity
• Pension
• 401K
• 403B (for employees of nonprofit or other tax-exempt organizations)
• 457(b) (for state and local government employees)
• TSP (for federal employees) IRA, RRSP (for Canadian employees)
• HSA

You most likely already are an investor (albeit indirectly).

To be clear, this would make you an indirect investor in public companies since your investments in any of the above usually take the money you invest, pool it with the money of other investors, and then invest that money in various assets, including (and in some cases only) public companies.

What Is a Public Company?

I answer this question in Installment #1 in a different way and you should read it for a complete understanding. With that in mind, the SEC considers a company to be a ‘public’ company if that company has public reporting obligations.  A company is subject to public reporting requirements if it does any of the following:

• Sells securities in a public offering (such as an initial public offering)
• Allows its investor base to reach a certain size, which triggers public reporting obligations
• Voluntarily registers with the SEC.

A private company can become subject to public reporting requirements by merging with a public shell company.  This process is called a reverse merger.

As mentioned, the SEC views a company as public if it is subject to public reporting obligations. There are instances, however, where the securities of a company that does not regularly report business and financial information to the public are nonetheless traded on smaller public markets. These companies trade on the “Grey Market,” as I use the term in Installment #1, any investing in them is riskier because there can be little public information to allow investors to make an informed investment decision about them.

Transparency and Continuing Disclosures

Federal securities laws are based on public disclosure by companies of meaningful business, financial, and other information.

A public company’s disclosure obligations begin with the initial registration statement that it files with the SEC.  But the disclosure requirements don’t end there. Public companies must continue to keep their shareholders informed on a regular basis by filing periodic reports and other materials with the SEC.  The SEC makes these documents publicly available without charge on its EDGAR website. The filed documents are subject to review by SEC staff for compliance with federal securities laws.

Following are some of the reports that may be filed by U.S.-based public companies. Foreign companies that file reports with the SEC may file different types of reports:

• Annual Reports on Form 10-K. This report includes the company’s audited annual financial statements and a discussion of the company’s business results.  For suggestions on making your way through an annual report, you may be interested in Financial Poise’s “Know Thy Numbers’ column, which provides readers with a plain English education about accounting and finance.
• Quarterly Reports on Form 10-Q. Public companies must file this report for each of the first three quarters of their fiscal year. (After the fourth quarter, public companies file an annual report instead of a quarterly report.)  The quarterly report includes unaudited financial statements and information about the company’s business and results for the previous three months and for the year to date. The quarterly report compares the company’s performance in the current quarter and year to date to the same periods in the previous year.
• Current Reports on Form 8-K. Companies file this report with the SEC to announce major events that shareholders should know about, including bankruptcy proceedings, a change in corporate leadership (such as a new director or high-level officer), and preliminary earnings announcements.
• Proxy Statements. Shareholder voting constitutes one of the key rights of shareholders.  They may elect members of the board of directors, cast non-binding votes on executive compensation, approve or reject proposed mergers and acquisitions, or vote on other important topics. Proxy statements describe the matters to be voted upon and often disclose information on the company’s executive compensation policies and practices.
• Additional Disclosures. Other federal securities laws and SEC rules require disclosures about a variety of events affecting the company.  These include proposed mergers, acquisitions and tender offers; securities transactions by company insiders, and beneficial ownership by a person or group that reaches or exceeds five percent of the company’s outstanding shares.

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Jonathan Friedland is not an investment advisor. He holds no relevant licenses, nor does he have formal education in the area of investing. He is, however, an avid and reasonably successful investor in both private and public companies who has few other hobbies, a day job that has forced him to learn some of the same skillsets that some financial advisors have, and who is passionate about financial literacy. This article, like all articles published by Financial Poise, is subject to these legal disclaimers. This series draws in part on information that is publicly available at investor.gov and other websites owned by the U.S. federal government.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):

• Public Company Reporting
• Personal Finance & Investing Fundamentals 1.0
• Personal Finance & Investing Fundamentals 2.0

©2022. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.