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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At many companies, a significant portion of the executive’s pay comes in the form of options that increase in value as the stock price rises. The company might give the CEO the right to buy 100,000 shares at the current price at any point in time in the next 3 years. So, each dollar the price rises, means the CEO can exercise to gain another $100,000.
Some companies make option grants a form of pay for all employees, but it’s getting rare to see a company that doesn’t pay executives in this way. Because paying with options aligns executive interests with shareholder interests.
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