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
You are right that the company does not care directly. But the investors who bought the shares do care about the share price as they would want to sell them at a profit. And buying shares does entitle you to a part ownership of the company. Including a vote in the shareholder meeting. They can raise a vote to sack the CEO or any of the other executive officers, or they can include bonus targets for them in the budget. The shareholders are the people who control the company and make all the important decisions. The CEO is just a custodian for the day to day operations. So while the company does not care about the share price directly the CEO does want to keep the shareholders happy, and so he want to motivate the others in the company to make the shareholders happy, and that happiness is measured in share price.
The company can also decide to create new shares and sell them, and at that point the share price is really important. They will.do this so they have more cash for further investemnts into growth or paying bills etc
The company has owners. These are called the shareholders. The shareholders control the company through the Board of Directors elected by the shareholders. The Board of Directors is responsible for hiring the CEO/CFO and some senior executives. The shareholders want their assets (ie the company) to be worth more over time – and this worth is the share price. Therefore the Board wants the CEO and the executive team to focus on increasing share price.
The share price is usually influenced by things like revenue growth, earnings growth, stability, development and launching of new products, efficiency of operations, good PR etc etc.
Bottom line though – share price increasing is the goal, profits are the means to that goal.
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.
1. A publicly traded company has a fiduciary duty to make a good faith effort to return value to investors. Raising funds in an IPO and then ceasing to care and folding would open up all manner of civil and potentially criminal suits.
2. The CEO is accountable to the board of directors and the board of directors are accountable to shareholders. Allowing the company to fail would mean being promptly fired.
3. The founder, members of the board, CEO, and other high level employees will likely hold significant amounts of stock and receive further compensation in stock causing their personal financial interest to align with the company and fellow shareholders.
4. New shares can be issued with board approval to raise additional capital if deemed appropriate. Tesla for example has issued approximately 200 million new shares (adjusted down to if no splits occurred) since their initial approximately 100 million shares at time of IPO.
The “company” is not an intelligent being, so it doesn’t care about anything, neither before nor after the IPO. It’s the “owners of the company” that care about it’s value, and when you buy a share from a company you become an “owner of the company”. Of course everyone that buys a share wants its value to go up so it’s important for the “owners of the company” that the value keeps going up
No company sells 100% of their shares in an IPO. A certain amount of equity is sold off to the general public, but a lot is retained. Founders, early investors, and early employees will all either retain shares they had before the IPO or will have options to buy or sell shares at a future date.
Options are how a lot of CEOs and founders get paid because there are tax benefits to giving people options instead of a huge salary. So even after the IPO, these people have a lot of net worth tied up in shares, and their ability to make a profit from exercising options depends on the future sale price.
As an example, Facebook and Tesla are public companies but Musk and Zuckerberg still have a lot of stock and options. If the stock price falls, their options become worthless and their paper net worth declines, making it harder to get loans.
Stock programs are also how you hire good talent. If the stock continues to rise, new employees will continue to get rich after early employees cash out and retire. If your stock is stagnant or falling, the smart move is for workers to look somewhere else for a job so that they can become equity millionaires instead of just having a paycheck.
Stock is a currency of its own, and a company can dilute their existing shares by issuing new ones. It is very common for mergers and acquisitions to be stock heavy transactions, in which case the buyer wants to issue the fewest number of new shares to complete the transaction.
ELI5 answer:
Your question is exactly the reason they have to care for it. The stocks are structured in a way that the people running the company are incentivised to keep it valuable.
Their own salary is tied to it.
They themselves receive a part of salary as stocks.
Their stocks are tied for some time in the market so it’s in their interest to keep the value up for their own sake.
And most important of all, in most cases “company” owns more stock than what’s already out there. So if the price goes down, retail users lose money, but the company loses more.
“The company” is often a way to refer to the shareholders and C-level people. (CEO, CFO, CCO, etc)
They care deeply about the stock price because being a shareholder means they have a large amount of stock owned in the company. So the stock price being higher than before is actively adding (usually a lot) of money directly to their pockets. Someday they’ll want to cash out, and the higher the stock price is at that point, the more of a payday they get… sometimes talking about tens or hundreds of millions.
This is why when companies go public they often go downhill and stray from their original values – profit is a prime driver of stock price, and stock price matters above all else to the people at the top.
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