Understand Investing in Public Vs Private Company

Overview of Public and Private Company

Investments serve the best interests of the parties involved as the basic framework of any investment decision is rooted in profit-making over a period of time. When it comes to investment, investing part of available funds in a private company through the share channel or bond instruments etc. is a highly common option. But if viewed from a macro perspective, the economics of any society involves the role of government control and transformation of invested funds into national assets as well. This is where the mutual comparison of investing in a public company and in a private company comes into play. 

It is quite possible that some current expenditure like transfers in the form of pensions and cash subsidies may be used for investment purposes. However, public investment would not include these kinds of investments as they represent the secondary and indirect effects of current public expenditure. Loans and advances made by the government to public enterprises, other than temporary ways and means accommodation, are classified as public investments. These public investment decisions are concerned with the construction of capital assets like buildings, infrastructure, public utility equipment etc. – that form various socio-economic overhead facilities. Therefore, investment in public companies means investing in facilities that provide necessary services and support for a whole range of other activities and are not specific to one particular use or agency. These investments, therefore, are rather large and indivisible. 

The concept of public investment can be put into a clear focus by contrasting it with private investment decisions. Both the decisions link the present to the future in the sense that both involve postponement of current consumption in order to generate the capacity to obtain a larger flow of consumption in the future. Simply stated, this reflects the futuristic arrangement of both investment vehicles. However, since two different types of agencies undertake these investments, there emerge some notable dissimilarities between the two. First and foremost, the basic motives and objectives underlying public investment are different from those which give rise to private investment. In a private company’s case, private entrepreneurs invest a certain amount of money capital i.e. financial resources with a view to obtain a larger sum of money capital than the initial amount that they invested. The difference between the two is the surplus or the profit which is the basic driving motive for private investment decisions. It may be mentioned here that the various methods of discounting and investment criteria etc. and the manner in which they are used in a specific, well-defined situation for giving a concrete form to the profit calculus. The nature of the product, technology, market structure, degree of risk and uncertainty, conditions in the financial market, international factors, etc. influence the calculation and operation of the private profit motive. 

The public investment decision is not based on such criteria of private gain or loss because the state is a compulsory, coercive and juridical institution that generally acts and speaks on behalf of the entire community. Government undertakes investments for common social purposes and can make a draft on the resources of the community as a whole. 

Generally, these investments are such that they are complementary to a large number of private activities. If these investments are left to private entrepreneurs, either they may not be made at all or made inadequately on such terms and conditions as may be considered lop-sided. This would mean an extreme case of monopolization of essential services and the effects will be detrimental. Moreover, a private investment portfolio comes with specific, close-ended perspectives and the aim is to generate as much profit as possible. 

Key Differences

In view of the above, it may be safely said that as an investor, if you are considering an investment in a public or private company, you must always go in a balanced manner. What this means is that ultimately, a diverse investment mix is always preferable. Public companies have public listings in such a manner that makes them wholly transparent and accountable in the public eye. Moreover, there is the question of governmental interference and funding, which is very much an integral part of the profit generation in a public enterprise. Therefore, the degree of safety and stability of returns is guaranteed. However, given the fact that no quick short term benefits can be accrued in a swift manner, the volume of net returns stays relatively low over a period of time.

On the other hand, investment in a private company yields swifter and faster returns. However, the risk factor shoots up significantly. The whole focus is on ensuring profits in a comparatively shorter term with an added degree of stability too. But the factor of stability is not as much in focus as is the profit. Therefore, if you happen to be a new investor, you must tread cautiously when investing in a private company.

Another important dimension is that of options. Private companies offer rather quick ended and flexible benefits as an appealing option for the general public. However, public companies offer rather rigidly pointed options. This is because these services often happen to have a significant measure of government funding. As such, there is no specific thrust on the expansion of the consumer base. Therefore, the degree of flexibility in private companies comes as an added advantage. In view of this, it is always advisable to follow a pragmatic approach and adopt a middle ground. 

How to invest in these companies

An ideally balanced investment portfolio offers the chances of mixed investments in both private and public companies. The ultimate decision depends on the risk appetite, planned goals and key targets, inflation and stock pricing, etc. All these factors have a degree of impact on the investment decision in any case and therefore, must be carefully evaluated before going ahead with a particular plan of action. It always helps to have professional and technical advice for assistance which can help you in taking a properly thought out decision. This ensures that your funds stay safe and that there is net profitability of the investment.

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