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
The company doesn’t sell all of the stock. If they ever want to raise more money some day, they will sell some more stock, and they will care about how much money they can get for that stock.
They care about its price for the same reason anybody cares about the price of something they own a lot of.
Suppose you have a lemonade stand. Your annual revenue amounts to $200, and you get to keep $20 of that as profit after all expenses are paid. You found this new juice press that would enable you to double your sales and profit. The only catch is that it costs $100, so you’ll have to keep doing what you’re doing for five years to afford it.
But there’s an alternative solution: you bring in an investor! He gives you the $100 you need to buy the new juice press, and in return he gets 50% of your lemonade stand. That means he’s entitled to 50% of all future profit.
Since you doubled your revenue and profit, he’s entitled to $20 per year. His investment will break even in five years, and all incomes beyond that point is profit for him. However, lots of things can happen in those five years. The price of lemons might soar, which would reduce your profit. Or orange juice could become all the rage so nobody wants to buy lemonade any more. Or a neighbor could open their own lemonade stand across the street forcing you to cut prices to compete. All these things means that he’ll have to wait longer to break even and actually start earning money.
So in order to reduce risk and ensure that his investment pays off, he might prefer to cash out early. To cash out early and profit, he needs to find another investor willing to buy his shares for more than $100. A sure way of attracting other investors is to make sure that the price of your shares increases. He might argue that you should settle for cheaper ingredients, to increase profitability. That’ll increase the share price, at least short term. And provided that he succeeds in this, he might be able to sell his half of the lemonade stand for $120 a few weeks after he bought it.
Next summer, you may have gotten bored of running the lemonade stand, so you hire somebody to run it for you. To ensure that he’s incentivized to sell as much lemonade as possible and produce as much profit as possible, you promise him a performance bonus that’s based on the share price.
Because the people ‘in charge’ of the company own the stock.
At a basic level, suppose I am a one man company. I want to raise some money. So I create ‘100 shares worth $100 each. ‘ I give 40 to myself. I sell 30 Bob and 30 to Steve. By doing this, if there is ever a vote on what the company should do, I get 40 votes, Bob gets 30, and Steve gets 30.
Now what do Bob and Steve get out of this investment? They had to pay for the stock, unlike me. Well, Bob and Steve hope to drive the stock price up, so they can sell their shares and make some money. So if they drive the stock price up to $500, they make that money. Alternatively, they can take a dividend from the company.
Companies also try to ‘give’ important employees shares so they are incentivized to also raise the stock price. Normally VPs, Directors… would be given stock.
It’s not perfect, but that’s the idea. I was regular employee at various firms and often got stock options. I wanted the stock price to go up too, but I had far less of an impact to make it go up or care.
Simple summary. Stock gives me part ownership. If my 1% of stock is worth $1 today, I would love if that same stock would be worth $10 a year from now. Company stock goes up which means that my ownership share is worth more.
If by the company you mean the CEOs it’s because the CEOs make a lot of their money based on its stock price
Amongst other things, stock buybacks are a way for the company to (potentially) profit (later) as their stock value rises, without diluting shareholder value by issuing more shares.
The theory is that you give stock to employees and company managers to align their interests with shareholders. Because now the employees have skin in the game and will work harder to increase the share price through better company performance.
But yes there are also downsides when you do this because it incentivizes unscrupulous executives to cook the books to juice up the stock price.
Latest Answers