I’m writing a story about a company with a new leader focused on making stock prices rise. I want to get the company to do basically the opposite of making their company public. From what I’ve read, you don’t want to do buybacks as a company and going private might be equally as bad, but is it?
In: Economics
Here’s a real ELI5 answer. Imagine I start a company. I own 100% of the company. I’m also probably very poor – most companies don’t make much money at the start. Any profits the company makes go straight to me.
I decide to sell shares in the company. I have 10 shares that I will sell and in exchange for giving me money today I will give you 10% of future profit cause you effectively own 10% of the company. Company shares are usually based on a multiple of the earnings stream. If profits go up so will the share price.
Let’s say I am working on a new product that will grow earnings by 10x. And I realize that based on future earnings – the shares are really cheap. IE, I expect the value of the shares will rise when everyone realizes how great my new product is. Companies may choose to buyback shares when they feel they are undervalued. The more shares the company owns the more future profits they earn.
If a company buys back all the outstanding shares, they share profits with noone “public”, IE no one outside the company. When all shares are owned by the company it has been taken private.
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