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
executive stock option compensation… if price goes up it will be worth millions if not zilch, this is how boards motivate those that run the company to run it in such a way that stock price increases which is good for the shareholders. Share price tanks, the shareholders will vote to replace board members.
Maybe a bit technical for ELI5, but here goes… Investors assess their investments in terms of “return” over relevant intervals of time
Say I bought company XYZ on January 1 at 100 dollars. XYZ now is trading at an all-time-high of 110. “My year-to-date return on XYZ is 10%.”
Sounds like an objectively good investment, right? Who doesn’t want something that’s more valuable than it’s ever been?
Well, Company ABC is a competitor of XYZ; it started the year at 50 and is now trading at 60. Same gain of $10 per share, but the ytd return on ABC is 20% (10/50)! I would have gotten double the profit for the same amount invested over the same period.
As an investor I don’t care that XYZ has never been more valuable. I’m thinking about it in terms of the return I will earn if I buy it TODAY.
So in order to keep a stock an attractive investment, competitive returns have to be promised to new buyers; ie. keep increasing the share price!
Note that I am intentionally leaving dividends out of this simple illustration of the concept of returns over time.
Latest Answers