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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The company is owned by the shareholders, and the shareholders want to see their earnings per share go up every period. That is why they decided to buy shares, after all – to make money.
“Stock price” is just what the investment community feels the company is worth, and what a company is “worth” is really just the present value of all future earnings. So, if EPS goes up, dividends and/or share price goes up too.
The CEO is selected by the Board of Directors, who is in turn selected by the shareholders. So if the shareholders want earnings to go up, the CEO is going to make earnings go up else they be replaced by another CEO.
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