Public market investing refers to investing in securities that are openly and freely traded on exchanges. Compared to private market investments, public market investments generally have higher liquidity and lower barriers to entry, making them accessible to a broader range of investors. With public market investing, investors can gain exposure to stocks, bonds, ETFs and other securities to diversify their portfolios. However, public markets tend to be more volatile and efficient than private markets. By understanding the pros and cons of public market investing, retail investors can incorporate appropriate public market assets to meet their financial goals.
Public Markets Offer Liquidity and Transparency
One of the main advantages of public market investing is liquidity. Investors can buy and sell securities easily without disrupting the markets. Bid-ask spreads are typically tight for large cap stocks and government bonds, enabling investors to enter and exit positions seamlessly. Additionally, public markets operate with high transparency – prices are quoted in real-time and trading activity is visible. This allows investors to make informed decisions based on market dynamics. However, some assets like small cap stocks and corporate bonds may suffer from lower liquidity and transparency.
Low Barriers to Entry Allow Broad Participation
Unlike private equity or venture capital, public markets have relatively low barriers to entry for investors. One can open a retail trading account with low minimum capital requirements to gain access. Fractional share ownership also allows smaller investors to gain exposure to high-priced stocks. This gives public markets a broader investor base, adding to trading volumes and liquidity. However, individuals should be aware of the risks involved and trade prudently within their means.
Public Markets Exhibit High Volatility
Being open systems with many participants, public markets tend to experience high volatility in the short run. Prices fluctuate as investors react to news, economic data and geopolitical events. This may result in large swings over hours or days that are difficult to stomach for less experienced investors. However, long term returns have been positive for diversified portfolios, as evidenced by the upward trajectory of indexes like the S&P 500 over decades.
Public Markets Are Relatively Efficient
According to the efficient market hypothesis, public markets rapidly incorporate new information and reflect it in asset prices. This makes it difficult for any one investor to consistently outperform the broader market over long time periods. Actively managed public market funds also tend to underperform their passive counterparts after fees. Thus, retail investors may be better off with low-cost indexed investments for public market exposure.
In summary, public market investing provides investors with liquidity, transparency and accessibility to diversify their portfolios. However, these markets exhibit volatility and efficiency that should be considered. With prudent portfolio construction, investors can harness the power of public markets to meet their financial objectives.