As I understand it, once a company raises, say $5 billion in an IPO, the shares are sold and they get the money.
The shares are already with the public now. Why is it so important for public companies to grow their share price further every quarter? Why not focus only on the final profit margins?
In: Economics
The investors purchased shares (invested) in the company with the expectation that they would see a return on the money invested. This is typically through growth in the value of the company (and corresponding increase in share price).
If the investors are not seeing a return, then they (through the board of directors, which they elect) will start to demand changes in management. The board has the power to fire and replace the officers of the company (including the chief executive officer, or CEO). If the company is doing poorly enough, investors can elect new directors to the board to replace those in place.
Additionally, one of the benefits of being a public company (i.e., going through an IPO) is that a company can more easily access the public capital markets. A public company can sell more of its shares to the public to raise more capital without undertaking another IPO, which requires a lot of effort and expense. If the share price declines, it limits the ability of the company to do so.
It’s probably too complicated to get into here, but the profit margins of a company are typically an important input to valuation and share price. The share price just also takes into account a multitude of other factors, primarily expected future cash flows (which historical profit margins may be a basis for).
Finally, if your company’s share price goes down too much, it might become a takeover target for another company because it is easy for that company to buy more than half of your company’s shares on the stock market and take control of it.
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