Have you ever wondered why the global public equity market was valued at $100 trillion in 2024? Meanwhile, private equity stood at $913.1 billion between 2023 and 2028, growing at a CAGR of 10.44%.
For new investors, navigating the landscape of Public Equity vs Private Equity can be challenging yet crucial for building a diversified portfolio. Public equity offers the benefits of liquidity and accessibility, allowing investors to buy and sell shares on major stock exchanges easily. In contrast, private equity involves investing in privately held companies, often requiring significant capital and a longer investment horizon.
This overview highlights Public Equity and Private Equity’s unique advantages, risks, and roles, helping new investors make informed financial decisions.
What is Public Equity?
Public equity refers to companies’ publicly traded shares on stock exchanges like the NYSE (New York Stock Exchange) or NASDAQ. Any investor can purchase and sell these stocks using brokerage platforms, catering to individual retail and large institutional investors.
Key Features of Public Equity
Public equity consists of shares in publicly traded companies, offering high liquidity and easy access for all investors. Due to strict regulatory requirements, it provides transparency and allows investors to buy and sell shares quickly on major stock exchanges.
- Liquidity
One of the most significant advantages of public equity is liquidity. Investors can quickly buy or sell shares in public companies, providing flexibility.
- Regulation
Public companies are heavily regulated by entities such as the Securities and Exchange Commission (SEC). To ensure transparency, they must disclose financial statements, earnings reports, and other key data.
- Accessibility
Any investor that has a brokerage account can invest in public equity. There are many options, from small-cap stocks to large multinational corporations.
Public equity markets are vast and highly liquid. According to a 2023 report, the global market capitalization of equities was approximately $109 trillion, showcasing the scale and importance of public markets.
What is Private Equity?
While startups, small-to-medium enterprises (SMEs), or even large private firms may be the subject of private equity investments, private equity refers to investments made in companies not listed on public exchanges.
Private equity investments typically come from institutional investors, private equity firms, or accredited individuals who meet certain financial criteria.
Key Features of Private Equity
Private equity involves investments in non-publicly traded companies offering higher potential returns but with greater risk and illiquidity. Typically reserved for accredited investors, it requires long-term commitments and more active involvement in company management.
- Illiquidity
Unlike public equity, private equity investments are not easily bought or sold. Investors often have to hold onto these investments for several years.
- Limited Access
Private equity is typically reserved for high-net-worth individuals, institutional investors, or qualified venture capital firms.
- Higher Risk and Potential Return
Private equity investments often carry higher risk due to their illiquid nature and the fact that they invest in earlier-stage companies. However, they offer the potential for huge returns if the company grows or is acquired.
For instance, private equity firms eyeing the acquisition of nCino (NCNO) recently saw their shares surge by over 24%, highlighting the impact of such investments.
Comparing Public Equity vs Private Equity
| Aspect | Public Equity | Private Equity |
| Definition | Shares of publicly traded companies available on stock exchanges | Investments in privately held companies not traded on public exchanges. |
| Liquidity | Highly liquid shares can be bought and sold anytime during market hours. | Illiquid investments are typically long-term with no immediate exit options. |
| Access | Open to all investors, including individuals and institutions. | Limited to accredited investors, institutional investors, and private equity firms. |
| Ownership Control | Investors typically have little control over management decisions unless they hold significant shares. | Investors often directly influence business decisions and may sit on the company’s board. |
| Risk | Market risks, economic conditions, and volatility affect stock prices. | Higher risk due to illiquidity and the potential for failure of early-stage or distressed companies. |
| Potential Return | Moderate | Higher |
| Investment Horizon | Flexible: short, medium, or long-term, depending on investor goals. | Long-term typically requires holding investments for 5-10 years. |
| Minimum Investment | Low: Individuals can start with minimal amounts depending on the brokerage platform. | High; often requires large capital commitments, typically in the millions, for private equity funds. |
| Diversification | Easy to diversify across industries and sectors through public stocks, ETFs, or mutual funds. | Depending on the fund, diversification may be limited to a small number of private companies or industries. |
The Role of Public and Private Equity in a Portfolio
For most investors, public equity forms the foundation of an investment portfolio. It offers liquidity, diversification, and steady returns. Index funds or ETFs tracking major public markets provide a reliable way to build wealth over time.
Private equity, on the other hand, is often seen as a high-risk, high-reward component of a diversified portfolio. Institutional investors or accredited individuals who seek higher returns or wish to invest in emerging companies may choose private equity.
What is Better for New Investors: Public Equity or Private Equity?
When comparing Public Equity vs. Private Equity for new investors, public equity is typically the safer and more accessible option. Its liquidity, lower entry barriers, and transparency make it an excellent starting point for new investors.
Private equity, while lucrative, requires significant capital, patience, and a tolerance for illiquidity. New investors may not have access to private equity funds without meeting financial thresholds. Moreover, the long-term nature of private equity can be less appealing to those who prefer more immediate returns or liquidity.
However, private equity can provide diversification and potentially higher returns for those who can meet the requirements and have a long-term investment horizon.
Conclusion
In comparing Public Equity vs Private Equity, each offers unique benefits tailored to different investor needs. Public equity provides accessibility and liquidity, while private equity offers higher potential returns with greater risk.
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