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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If you are a publicly traded company, than if you turn a large profit every shareholder gets a cut of that profit (in theory). Now rather than pay out all that profit, usually a company will keep the money and reinvest it. But now the company is worth more money (because they made more profit and have more money than the market expected), and therefore owning a share of that company is more valuable, so the stock price goes up.
Investors want to keep the executives’ goals aligned with their own, so a large part of executives’ compensation is in company stock.
Put more simply – The market isn’t stupid. Your business’ performance and the stock price will be very highly correlated.
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