Three reasons why some investors choose public companies

Whether you’re an avid investor or not, you’re probably familiar with the mantra of buying low and selling high. The challenge is that it takes courage and confidence to invest when the market is in a downtrend. Many wealthy Americans see this as a lucrative opportunity buy assets at a discount; however, this segment of investors already has the capital or borrowing capacity to make the investments.

Regardless of your current financial situation, it is always important to determine your financial goals and risk profile before investing. People approaching retirement age may prefer a more conservative approach, while longer maturities lend themselves to more aggressive portfolio allocations. All but the most conservative portfolios should consider a large allocation to public company stocks. These investments can provide advantages in terms of liquidity, visibility and monitoring that other asset classes simply cannot offer. Liquidity may not seem important at first glance; however, you’ll be glad it’s there if you need it.

1. Public markets can help protect liquidity

A wide range of investment opportunities are available, so why should public companies be considered over other asset classes? A key advantage is that they can provide much more cash than private companies or other similar asset classes. Although many investors set goals for long-term financial stability, it is always possible that your financial situation will change. Cash flow may not be an issue at the moment; however, unexpected expenses or situations may arise that require you to withdraw money from your investments.

You can always decide to exit investment if necessary with listed companies. Selling publicly traded stocks on established exchanges allows you to access your money with relative ease. This contrasts with publicly traded companies, where it can be difficult to find a buyer on short notice. Selling private property quickly may involve accepting a price below fair market value to complete the transaction. You can avoid these hurdles if you own shares in public companies.

2. The double advantage of companies with dividends

Some companies choose to distribute a portion of the company’s profits to shareholders in the form of dividends. Not all investment categories do this, but it’s more common among established public companies. Everyone expects the stocks they hold in their portfolio to make money; however, only some companies regularly provide this stream of income to shareholders.

The fact that a company has dividends is usually a sign that the company is doing well. For example, Apple and Microsoft are among the companies that pay dividends to their shareholders. To do this, the company must have sufficiently substantial operating profits that it does not have to be reinvested entirely in the business. In contrast, start-ups and small-cap companies generally funnel all profits back into the business, as growth is essential at this stage. If you prefer safer investments, consider companies with dividends, as you know they have generated positive cash flow in the past and will likely continue to do so.

3. Regulation provides checks and balances

The process of listing a company on the stock market is extremely rigorous. There are many requirements that a company must satisfy. Every country that allows shares to be listed on the stock exchange has most likely also had regulators to protect the investing public. This takes many forms, but some key elements are global accounting standards, compliance with the United States Securities and Exchange Commission (SEC) or equivalent, and laws governing the state and country where the company is domiciled. Suffice it to say, this process continues to improve, and all of these measures are designed to protect investors. Given the level of control, a significant investment of time and resources is required from the company. Thus, only those who are confident in their business plan choose to go down this path.

Regulations require listed companies to make key company information available to investors. In addition to finance and management, potential investors can also examine a company’s board of directors to see who runs the organization. Board members with Fortune 500 experience offer a different perspective than those who have never held a seat on a company’s board before. All of this information is available to help investors make informed decisions before buying stocks.

Keep in mind, however, that not all public companies have the same level of risk. Young companies have less track record to assess; it is therefore more difficult to predict how they will behave in the future. A stable, large-cap stock is unlikely to double anytime soon, while smaller companies offer higher possible rates of return.

Exchange Traded Funds (ETFs) are an alternative offering the possibility of investing in an entire industry, such as energy or technology. For marginal additional cost, these instruments offer a blended return as well as many of the same benefits and protections of direct investments in public enterprises. A nice advantage of this approach is that no research is necessary. Some ETFs offer a debt-to-equity ratio to better align with your risk profile.

You can always choose to leave your money in the bank, but you may miss opportunities to strengthen your financial future. Every investment carries some risk, but if you had the opportunity to make informed investment decisions with historically stable returns over the long term, would you accept it?

The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific situation.

Robert D. Coleman