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
Lots of correct answers here. Also, a lot of top exec compensation is in the form of shares of stock.
Everyone who buys a company wants that company to be worth more tomorrow than today.
Every public company has thousands of new owners every single day.
Because those shareholders are the owners of the business. They can hire and fire the executive team through the board, which they appoint. Shareholders want to make money on their investment, and that requires he stock price to increase.
It’s because the company itself buys the shares as well. This lets them maintain an element of control in the board, but still raise the money.
Others have good answers on how shareholders can and wants to influence share price so I’m not gonna repeat it
The other reason is share issuance and buyback. For a variety of reasons (mainly taxes) companies have issued more and more shares and its derivatives, whether it is to raise more capital or as a part of employees’ compensation package (for both regulars and C-suits). And for similar reasons, they are also issuing more share buybacks instead of paying dividends.
Both of these are directly impacted by the market price of their shares.
There are different strategies on how to deliver value to shareholders.
What you’re describing is the traditional method. Shareholders buy and hold stock for the dividend payout.
You can also reinvest the majority of your profit and focus on growth. This increases the value of the stock by increasing the value of the company, ( revenue, assets, market share).
Part of the reason companies can seem so ruthless is that raising the stock price is really the only goal. So fucking over the workers, putting out an inferior product to cut manufacturing costs, etc., is just part of the process of “success.” That’s why your executive pay packages often contain significant options clauses. It ensures that executives focus on stock price to the exclusion of virtually everything else.
Very often officers of the company get shares as long term incentive. The higher the value of the stock the more their long term comp is worth.
Who is “the company”? That would be the owners. Who are “the owners”? The people who own those stocks.
A lot of CEO’s get paid with stock, which isn’t taxed until it’s cashed out. This leads to them making decisions that boost the short-term profit-reports, to the detriment of long-term profitability
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