I just don’t understand how it works…when I hold shares in a company and I spend money there, am I technically making a very very small amount of that money back?
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what is the simplest way to explain how stock prices increase then?
In: Economics
Edit: Misread the question as if you are an employee spending the company’s money of stuff. I’m not rewriting this whole thing since it does cover how stock prices are affected by bother earnings and expenditures.
End of edit.
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The price of a stock is correlated to the company’s profitability but there’s little to no direct causative link — unless the stock pays dividends. (The rest of this post assumes the stock DOES pay dividends.)
The price of a stock is determined based (essentially) on how much people want it which, in turn, is based on what they think the price of the stock will be later on. Additionally, if the stock pays dividends, the amount of the dividend is based on the performance of the company.
So if you spend a bunch of money, this could reduce the performance of the company which would shrink the dividends or possibly make the company less desirable since it didn’t perform as well as projected or something like that.
But the amount of money you’d have to spend in a publicly traded company to affect performance is, like, a lot of money. On the order of 7 or 8 figures. And it’s not just about the expenditure but also the revenue resultant from the expenditure.
Like, if I spend $10m on a marketing campaign, there’s a really good chance than the revenue that comes in from this marketing campaign will at least partially offset that $10m. Of course we *hope* that the revenue exceeds $10m. (This is referred to as ROI, Return on Investment, how much money we’ll make from spending xyz amount of money.) If the marketing campaign has a positive ROI, the stock has a higher likelihood of paying a bigger dividend which raises the demand for the stock which raises the price of the stock.
Now, let’s say ~~Warner Bros~~ Disney fully produced ~~a Batgirl film~~ another Avengers film but cancelled it before release. (For this scenario, let’s say that they’re also not claiming the loss on taxes or insurance. If this was done intentionally, it would be tax fraud or insurance fraud, of course.) This represents a huge expenditure with no revenue. The company is not making that money back since they stupidly decided that nobody can pay to see this film ever. This represents negative ROI and likely represents a lower than projected earnings number which would result in a lower dividend payout, reducing the demand for the stock, in turn lowering it’s price.
tl;dr: Stock price is less about the spending and more about how much the company makes as a result of spending.
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