From my little understanding, company’s issues stocks to raise money. So once the company’s sell those stocks, why does it stock prices matter to them?
In: Economics
A stock is part ownership of the company.
So stocks aren’t just something they sell off and walk away from the people who own stocks are the people who own the company. Everything the company does is ultimately for their benefit.
Some stock is sold off to investors to get the money to get the company going. Some is held by founders or early employees. I won’t get into “stock options” but the basic idea is that instead of getting paid in salary, some people who work at the company get stock or the opportunity to buy stock. The company likes this because in the early days, they don’t have too much cash and they want to use the cash they have to get started. Employees and founders like this because if the company becomes very valuable then they can make a lot more money from the stock than they ever would have gotten paid and it’s taxed at a lower rate than a straight paycheck for similar amounts would.
So all those people, the early investors, the founders, the early employees- they together own the stock or have sold some off to other investors. And all those people who own the stock own the company. More or less if most of those people want the company to do something- it’s their call, because it’s their company. And what they mostly want the company to do is make their stock worth more.
In addition to the correct answers already given here, many companies use equity as incentives for retention and hiring. If the stock price is not increasing this will be less effective.
A lot of the answers given so far are telling you that the big problem would be unhappy investors selling their stock. But not answering why management would care if investors sell their stock and the price goes down. Here’s a few;
* Self-Interested Management
* Company principals often have their compensation tied to stock performance (as a proxy for overall business performance), and so are incentivized to maximize it
* Shareholders expect management to increase the stock price or pay dividends to make their investment worthwhile, and may intervene in the Board if they are satisfied, including calling for things like replacing management, spinning off business units, or trying to sell the company, etc
* Fiduciary Duty
* Management has a legal obligation to act in the best interest of shareholders, which is almost universally understood in board rooms to mean increase shareholder value. Decisions that deliberately reduce shareholder value could open management up to civil liability, including class action lawsuits
* Reduces Costs of Doing Business
* When a company’s share price is higher, it means they are more valuable, which in turn means they can get access to bigger loans from banks or bondholders at lower interest rates. As an analogy, it’s like the difference between someone wanting to take out a HELOC on their paid off home vs. getting an unsecured loan from the bank. The unsecured loan will be smaller and have way higher interest rates. In essence, the company’s ownership stake becomes collateral for loans.
* Why is this good? Because a company that can take out loans more cheaply than their competitors is more likely to beat them. Imagine two companies in the exact same business, say Coca Cola and Pepsi. Coke can take out loans at 3%, but Pepsi costs them 5%. For any new venture that they embark on, Pepsi needs starts off at -2% in the hole to be profitable compared to Coke. That means they’ll have to charge higher prices, or pay less attractive salaries to workers, or source lower cost materials, etc, in order to remain competitive
* Corporate Defense
* A higher stock price means the overall valuation of the company is higher, which in turn means it is harder for a outside party try execute a hostile takeover or leveraged buy-out
Because the people who bought the company’s shares now have a financial stake in the company’s stock price.
If you invest $5000 in a company, you *absolutely* do not want to see the share price drop. And if the people running the company can’t keep the stock price up, then you as a shareholder can vote to sack them and replace them with people who can.
Basically, if the CEO doesn’t keep the stock price up, they don’t keep their job
There’s more than one reason:
1. Managers are rewarded in shares or options
2. Shareholders will fire the managers if stock plummets
3. Companies occasionally want to raise new capital, *especially* when things aren’t going great (=stocks are down).
4. To use for mergers and acquisitions- they are commonly settled (partly) in stock.
5. To protect against hostility: if it’s easy/cheap to buy shares, these shares are cheap votes. It’s also cheaper to be prey of a take over
Because people who own or buy stocks don’t want to lose money. So stock prices matters. If the stock price falls too low but it’s a valuable company, it can be targeted for a takeover.
One tangible reason is that the stock price is instrumental in setting the price of a hostile takeover. They’re a bunch of other reasons but I didn’t see this one mentioned.
Coupled with what others said about stockholders and the board. If a company’s stock price is low enough it becomes a takeover target. And you never know what you’re going to get with a takeover
Every share is owned by someone. People that own things certainly like the things they own to be worth more.
When you have a valuable thing, it is only valuable if *someone else wants to buy it from you*.
Whoever holds the most shares generally has the most power in a company, and the most interest in the share price.
Now imagine it just stays the same in value, and has a history of staying the same value. Why would *you* trade a dollar for something that is equal value and is less useful than a dollar? No, you’re only interested in buying shares if it has a benefit (you can sell it in the future).
You own a company. You hire a manager to run it. You probably want your manager to run it in a way that makes the company more valuable than it was before. You’d probably be upset if this manager ran it into the ground. Similarly, CEO’s and other managers are hired by stockholders (owners of the company) through the board of directors. Stockholders want management to run the company in a way that makes it more valuable over time
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