Companies make money by selling products and services. If they sell well, they get profit. Bang, end of story, right? Where does stock price come in and why does it matter?
I do understand that during IPO the company basically sells stock, instead of product and services, and gets profit from that. But later on, when stock is just traded between people outside of company, why does its price matter **to the company?**
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For most public company executives, equity is the largest component of their compensation. The higher the stock price, the greater the value of the equity they earn each year. That’s why company executives care about stock price.
Stock price matters to the company (not the shareholders, not the executives) because with a low stock price, it’s easy for another company to buy it and change everything, shut it down, etc. The company’s continued existence depends on a high enough stock price.
The other side of that coin is that with a high stock price, this company can be the one to gobble up the cheaper struggling ones.
Stock price represents the value of the company (price per share x number of shares = total value of the company).
It matters to the company because a low share price makes it easier to buy more stock; thus the possibility of a takeover increases. Quite often this will be a hostile takeover by a competitor who wants to either take them out of the market or acquire certain things (IP, products, market share) and then get rid of the bits they don’t want either by selling them off or simply closing them down.
Three main reasons:
1. **Aligning Incentives:** A large portion of executives’ pay is in stock. The reason for this is that you want to incentivize the executives to increase the value of the company for shareholders. If the stock price increases, the executive makes more money (as do the rest of the stockholders), so the executives obviously want the stock to go up. It is simply about aligning the incentives of the executives with that of stockholders.
2. **Raising Capital**: If a company needs money (for example, to build a new factory) there are various ways they can do that. They could go into debt (either get a loan from a bank or issue bonds/notes/debentures) or they could sell shares (equity). The best option will depend on a variety of factors, but the main benefit of raising money by issuing equity (i.e., selling more shares) is that you don’t have to pay it back! Because it’s not debt! The main drawback is that your existing shareholders will be “diluted,” meaning that whatever % of the company they owned before you sold new shares will be reduced. If a company wants to raise $100 million dollars by selling shares, it’s much better to have a high stock price because then you need to sell fewer shares in order to raise that $100 million (and therefore your shareholders will be less diluted).
3. **Debt Covenants**: Many loan agreements will have what are called “covenants” that the debtor (the company) has to abide by. A covenant basically says “you have to do this” or “you cannot do this” or else you are in default and the bank can demand that you pay back the ENTIRE loan RIGHT NOW. For a publicly traded company, a covenant might say “you can’t pay any dividends if your stock price is below $x” or “if your stock price falls below $x, you have to pay back 15% of your loan immediately.” In this case, the executives want the stock price to go up, but more importantly they DEFINITELY don’t want it to go down too much.
A more extreme example has to do with stock exchange rules. The New York Stock Exchange and Nasdaq (and probably every other major stock exchange in the world) have rules that say if your share price is too low for an extended period of time, you will be delisted. Delisting is a very, very bad outcome.
Lots of good answers here already (about exec compensation), but i haven’t seen anybody mention the ability to leverage its own shares when trying to acquire a different company. If my company shares are valued at $100, and i can buy your company with my own shares, then that preserves my cash reserves for other things. If my shares were only worth $50, i have to give up more of my company to acquire yours.
Well, stock price matters to owners. Executives often also own stock of the company and even if they do not, if the owners aren’t happy, soon the executives are looking for a new job.
For the company stock price matters because it influences future investments, if the company has low valuation, it has difficulties raising more money and is susceptible to being bought out by competition.
Even the CEO of a company has a boss, that boss is the owners of the company. The company owners care about the share price, therefore the CEO cares about the share price.
There’s lots of additional reasons, such as stock compensation and so on. But the core and real reason is that the company cares because the owners care and the company cares about what it’s owners care about.
Stock prices are like loans rates for companies. Specifically stocks and bonds are just debt issued using different terms. On a very fundamental level the income a company makes is literally: the value it adds to the capital used to produce a good or service (i.e. profit), minus the cost of that capital (i.e. the interest rate it borrows at).
It is way harder to increase the value proposition of a complex product, than it is to say your company is great and you see a good future for the stock price.
Imagine you and your friends were given 1 round metal disc today – if you go to the candy shop, you can buy 50 today but you’re also told, that it may also get you 100 on certain days and just 10 on other.
You’d naturally expect that the disc should get you more than 50 candies at any day in future. So is the case with Company Execs.
> Bang, end of story, right?
No, not end of story. The profits go to the stockholders via dividends or buybacks (for “mature” companies, things work a little differently for “immature” companies). E.g. if a company makes $100 million a year, and you own a few shares, you might have 1/1000000 (one millionth) of the company. Meaning you get $100 per year. In other words, the stock is like a financial instrument that pays you “$100 per year, forever (Asterisk)”.
Where the Asterisk says that the “Forever” part is in no way guaranteed. If the company does poorly, you might be paid less than $100 a year, or nothing at all. If the company does well, you might be paid more than $100 a year.
> Where does stock price come in and why does it matter?
Ask yourself a couple basic questions:
– How much are you willing to pay right now to get $100 a year, forever? $500? $1000? $3000?
– Alternate form of the same question: Suppose you’re getting $100 a year, forever. But someone offers you money right now instead, how much would they have to offer for you to sell your $100 a year, forever income stream? $500? $1000? $3000?
If you hear the company’s doing poorly, and that $100 a year might turn into $70 a year, how would that change your answers to these questions? What if you hear the company’s doing well, and that $100 a year might turn into $150 a year?
The moral of the story is that stock price, dividends and company performance are all related (at least in theory).
> for company executives
CEO’s and other company executives are professional managers hired to *run* the company. They don’t *own* the company. The CEO’s boss is the shareholders. The shareholders can hire or fire the CEO and other top-level executives and raise / cut their pay. (For a big company, say Microsoft, it might have like 100,000 shareholders so it’s hard to get them all to do *anything*, and if you own stocks in like 30 different companies it’s hard for you to keep in the loop for the decision making of all of them, so usually the shareholders elect a small committee of representatives called the “Board of Directors” to act for them. BoD can vote to hire / fire the CEO, and shareholders can vote for the BoD members with a simple majority, or even vote to change the “constitution” of whether / how many / how they .)
What this means is that the shareholders directly benefit from the stock price, so they will generally be happy with the company and want to keep the same CEO in place when the stock price is going up. But they will be unhappy and possibly want to replace the CEO and other top executives when the stock price is going down, especially if the reason for the decline seems to be that the company is poorly managed.
Also as many other posters have noted, it’s common practice for CEO’s and other high level executives to have a significant number of shares. (Commonly referred to as “Aligning incentives” or “Skin in the game.”) If the CEO owns a lot of shares then they will make a lot of money if the company does well, and will lose a lot of money if the company does poorly. So the CEO has reasons to run the company well.
(In theory. In practice, CEO’s too often try to create short-term boosts of share price for long-term viability. BoD / shareholders can try to prevent this by “locking up” the CEO’s shares so they can’t sell for a period of time, but it’s considered unreasonable to have a lockup period of more than a few years.)
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