How does a company’s stock price matter to the company?


My (possibly incorrect/incomplete) understanding is that if a pre-IPO company needs $1000, they can issue 100 shares for $10 each. If people outside the company actually buy all 100 shares at that price (which I think almost always happens), then the company gets the needed $1000. Thereafter, if the stock price becomes $15 or $2, how does it matter to the company? They’ve already received the $1000 they needed, right? Any subsequent trading isn’t actually generating money to run the company, right?

In: 8

Lower stock prices can put you at risk of takeover.

Lets say this stock price drops to 2.00 a share. I can buy 51 shares, for 104, and effectively own the company.

Or if I’m a stockholder, and the price goes down, I might get upset. The stockholders generally elect the board of directors, who have the power to fire. So we can demand the Board of Directors fire upper management. If they refuse, the stockholders can elect a new board who will fire the upper management.

Its also just good for business. A growing company with a lot of value can use that to get loans, other companies want to work with them, etc.

*In the U.S.

The shares that are sold are literal ownership shares of the company. Depending on how the share offerings are structured, it is possible for the owners of those 100 shares to be the outright owners of the company. They own and control the company. The C-level executives are their employees. If the shareholders don’t like where the company is going, they can fire the people holding those positions. Usually C-level executives will also own shares, so they have a vested interest in the share prices doing well.

You are correct that subsequent trades on the open market don’t generate extra income for the company. But that doesn’t mean that the share price is no longer of concern to the company. Lets say the company grows well and finds itself needing $100,000 the next year to support increased expansion to take hold of opportunities. The company can spin out more shares for sale. The current market value of the company’s shares impact how many shares the company will need to create to generate the revenue. It also increases the likelihood that an investor will buy those shares. If the share prices tanked and the company did nothing to address the issue investors are going to be reluctant to buy the shares and risk the same thing happening to them.

Upper management keeps a significant amount of shares, and that becomes their golden parachute.


That said, stocks and stock options are typically part of an executive and other employee compensation packages, so they have vested interest in the stock price. Likewise, Board Members, theoretically representing shareholders, will not be happy with a per performing stock price and may elect to replace the executive team if the stock isn’t performing well.

There is also long history of companies, who are still very profitable, announcing layoffs/restructuring, essentially to meet shareholder/market demands to increase boost their profitability/stock price. Or in the case of companies like Apple, who are sitting on large piles of cash, announcing massive stock buy backs, to raise the price/value of their shares vs reinvesting the cash in product development, new ventures, or employee compensation.

At that point, the value of the stock matters to the *owners* of the company — the shareholders. Owning a share means owning a piece of the company, which entitles you to vote on certain things like the board of directors to guide the company. Minor shareholders rarely vote, but the major ones do and they tend to vote for policies which increases the value of their investment.