eli5 why do companies with billions in the bank care about stock prices. Wouldn’t they be financially fine if the stock lost money?
In: 103
To clarify some of the other answers here, I think we need to explain what stocks are.
Imagine you want to start a widget business. You can make money selling widgets, but you have to manufacture them first. Factories are expensive, but you don’t have money yet because you haven’t manufactured widgets to sell yet.
So how do you get money? You might just get a bank loan, but for various reasons that’s often not possible. So instead, you go around and sell pieces of your not-yet-existent widget business. You say to people “If you give me money now, I will give you this document (a stock) that entitles you to own 1/10,000th (or whatever percentage) of my widget business”.
So now you have a bunch of money, which you can use to build a factory. You start selling widgets and making a profit.
But you don’t _own_ the business (or not all of it anyway). All those people who you sold chunks of your business (stocks) to want a say in how _their_ business is run. So as part of the deal they get to appoint a board, who is your boss and who decides how the business is run (in reality the founder of the business probably owns a lot of stock and has a lot of influence, but it amounts to a similar situation in the end).
So what do the actual owners of the business want (including you if you have a lot of stock)? They want to get a return on the money they gave you. They want to the stock price of the company to go up so that the stock they bought can be sold to someone else for more than they paid for it. And since these are the people who own the company and run it via the board, what they care about is what the company cares about.
[deleted]
What companies have billions in the bank, liquid?
If the stock loses value, the investors who own the stock get grumpy. If enough of them get grumpy enough, they complain to the board of directors. Often when that happens, the CEO and other members of the leadership team get fired. Nobody wants to get fired. Therefore the leadership team cares very much about the stock price.
What kind of company has “billions in the bank”?
If a company just sits on billions and don’t do anything with them that’s a really bad company.
Their “billions” is usually made up by stock as well one way or another.
And a company has owners, the owners own the company through stocks. So the owners will lose (potential in some ways) money if the stocks lose value. A company in itself doesn’t really have any wishes at all, it is the owners that control it.
Their incomes and cash flow can still be great even with lower stock prices though. But in general if stock prices drop the reputation takes a hit and they might lose some customers. If they need more money to continue to expand/develop it is usually harder to find new investors and you have to give up bigger parts of the company to get the same amount of money from investors that are still interested.
Usually (although this seems to be a bit less true lately) the stock value is also based on current and expected performance. Although Drops sometimes happens more as a reaction to the bigger picture rather than changes in the company itself it still usually has some impact. Recessions, pandemics, increased interest rates and so in tends to impact most companies negatively compared to future expectations.
The shareholders are the company.
The entire point, the only purpose of a public company is to make money for shareholders and raise the stock price.
First, company executives have a fiduciary duty (legal obligation) to serve the shareholders, so they need to make decisions on that basis.
Also, big businesses have many important employees (exceptional managers, people with specialized technical skills) who are paid in part with stock options. When your stock price is performing well, that helps you retain quality employees; if your stock price craters, it makes it much easier for competitors to poach your best workers.
Top level executives perhaps have the bulk of their compensation in stocks so if the stock loses value, whatever you own is now worth less. Plus the more value a stock has, the more capital is in the company.
Think of it like interest on loans, the rate can be very impactful of how expensive or cheap they are.
Companies generally don’t leave money on the table by putting it in the bank. They reinvest profits or do stock buybacks so when they need capital they can issue more stock. That’s why the price is so important.
A company is run by a CEO and their employees. However, the boss of the CEO is the board. The board represents the shareholders (*aka* owners of the company) and have the ability to fire the CEO and hire a replacement.
A company may be financially fine if they have a substantial cash balance, but companies are valued on market cap. Market cap is determined by share price and shareholders, management, and employees with stock incentives are all incentivized to want a higher share price.
Latest Answers