Private vs public equity: Key differences and which is more suitable for you?

Are you looking to invest in the stock market but don’t know the difference between private equity and public equity? Well, understanding the key differences between these two types of equity can help you make informed decisions based on your risk appetite, financial goals and investment strategies.

In this article, we will learn about private vs public equity and explore the benefits and risks of each to help you determine which investment option may be more suitable for your needs.

• Table of contents

1. Definition of public equity
2. Key features of public equity:
3. Definition of private equity
4. Key features of private equity
5. Benefits of investing in public equity
6. Risks of investing in public equity
7. Benefits of Investing in Private Equity
8. Risks of private equity
9. Private vs public equity – the difference

Definition of public equity

Public equity means owning shares of a company that is listed on a stock exchange like the BSE or NSE. When a company goes public, it allows people to buy small ownership stakes in its business, represented by each share. These shares can be bought and sold quickly, giving investors the flexibility to trade them whenever they want. Since these shares are available to the public, they are called public equity. Investors can buy such shares directly through the stock market or indirectly through investment vehicles such as mutual funds.

Key features of public equity:

• Publicly traded: Shares are listed on stock exchanges and can be bought or sold easily.
• Regulated: Companies must comply with strict financial reporting and regulatory requirements.
• Liquidity: Public stocks, especially of well-performing companies, tend to be liquid, meaning investors can quickly buy or sell them.
• Voting rights: Shareholders can have voting rights in the company.
• Market-driven pricing: Share prices fluctuate based on market demand, economic conditions, and company performance.

Also Read: What are different types of equity funds in India?

Definition of private equity

Private equity refers to investments in companies that are not publicly traded on stock exchanges. Private equity firms, institutional investors or high-net-worth individuals often invest in such equities. Private equity investors provide capital to businesses in exchange for ownership stakes, aiming to improve operations, increase profitability and generate high returns.

Key features of private equity:

• Privately held: The shares are not publicly traded and ownership is limited to a select group of investors.
• Long-term investment: Investors typically hold private equity investments for several years before exiting.
• Limited liquidity: Since shares are not publicly traded, they may not be as liquid.
• Higher risk, higher return potential: Private equity investments can offer higher returns but also come with higher risks.

Benefits of investing in public equity

Here are some of the advantages of investing in public equity:

High liquidity

Public equities are highly liquid, meaning investors can buy or sell shares quickly whenever needed. This flexibility allows investors to adjust their portfolios based on market conditions or evolving personal financial goals.

Transparency and regulation

Publicly traded companies must adhere to strict financial regulations and disclose their earnings and operations regularly. This transparency helps investors make informed decisions based on company performance.

Lower investment threshold

Public equity investments are accessible to retail investors with minimal capital. Investors can start with a small amount and gradually increase their holdings over time.

Diversification

Public markets offer a wide range of investment options across industries and geographies. Investors can diversify their portfolios to mitigate risks and maximise return potential.

Ease of access

Retail investors can easily invest in public equities through stockbrokers, mutual funds or exchange-traded funds (ETFs). Online trading platforms make the investment process seamless and efficient.

Risks of investing in public equity

Market volatility

Stock prices fluctuate based on economic conditions, political events and company performance, among other factors. Investors may experience steep drops in the value of their stocks if the market declines. Volatility can be high, especially in the short-term.

Limited control

Public equity investors typically do not have direct control over company operations or strategic decisions. Shareholder influence is often limited to voting rights in annual meetings.

Lower return potential

Public equity can offer potential to build wealth over time, but returns can be lower compared to higher risk avenues such as private equity and alternative investments.

Emotional investing

Public markets are highly reactive to news and speculation. Investors may make impulsive decisions based on short-term market movements, leading to potential losses.

Benefits of Investing in Private Equity

• High returns potential: Private equity investments have the potential to outperform public markets over the long term.
• Active management: Private equity firms provide hands-on strategic direction to improve company performance.
• Access to exclusive opportunities: Investors gain entry to private companies not available in public markets.
• Long-term value creation: The focus is on fundamental improvements rather than short-term market fluctuations.

Risks of private equity

• Illiquidity: Investments are locked up for years, limiting access to funds.
• High capital requirement: Typically requires substantial upfront investment.
• Market and business risks: Companies in the portfolio can underperform or fail entirely.
• Lack of transparency: Limited public disclosures compared to publicly traded firms.
• Complex fee structures: High management and performance fees can eat into returns.

Private vs public equity – the difference

Accessibility

Public equity is open to all investors, including retail and institutional investors. Private equity is typically restricted to institutional investors, private equity firms and high-net-worth individuals.

Liquidity

Public equity investments are highly liquid and can be bought or sold easily on stock exchanges. Private equity investments can have lower liquidity and may require a long-term commitment.

Risk and return

Public equities offer moderate returns with relatively lower risk. Private equities have higher risk but the potential for higher returns.

Control and management

Public equity investors have limited control over company decisions. Private equity investors can play a larger a role in a company.

Investment horizon

Public equities can be held for short or long periods, depending on investor preferences. Private equity investments typically require a longer holding period.

Conclusion

Both private and public equity investments have unique advantages and risks. Public equity offers accessibility, liquidity and transparency, making it a preferred choice for retail investors. On the other hand, private equity presents opportunities for higher returns, active management and long-term wealth creation but requires higher risk tolerance and more access to capital. Investors should consider their financial goals, risk appetite and investment horizon before choosing between private vs public equity. By understanding these differences, investors can build a diversified portfolio that aligns with their wealth-building objectives.

Also Read: Private equity funds explained: Types, benefits, and investment insights

FAQs:

What are the main differences between private equity and public equity?

The primary differences lie in liquidity, accessibility, risk levels and control. Public equity is traded on stock exchanges and is accessible to all investors, while private equity is usually accessible only to institutional and high net worth investors and requires a long-term commitment.

How do investment strategies differ in private and public equity?

Public equity investors focus on stock price movements, market trends and dividends. Private equity investors take an active role in company management and aim for long-term value creation through the company’s performance.

Are there advantages of investing in private equity over public equity?

Private equity offers higher return potential, more control over company decisions, and long-term wealth-building opportunities. However, it requires a much higher risk tolerance, longer investment horizon and a significant amount of capital.

How does liquidity compare between private and public equity investments?

Public equity investments are highly liquid and can be traded instantly, whereas private equity investments have limited liquidity and often require holding periods of several years.

Which type of equity investment is better suited for long-term growth?

The more suitable avenue depends upon your goals, risk appetite and investing capacity. Both can help potentially build wealth in the long term. Private equity can offer higher growth potential but entails much higher risk than stocks. Also, it is typically accessible only to HNIs and institutional investors. Stocks, while also risky, are more accessible to retail investors than private equity.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.