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Why would a company care about the price of its ownshares in the stock market?

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After a company has issues shares, why should it care if the value of the shares go up and

down?

Since the shares are now being traded among the public, if the value goes up or down, that is

strictly a transaction between buyer and seller and none of whom are directly related to the

company.

e.g. if I sell X an iPhone for 1 ! , why should I care if X is selling the iPhone to " for 1

dollar or 1 dollars? I have got my 1 !, so I need not bother. #o?

investing stoc$s mar$ets stoc$%valuation

shareimprove this &uestion edited Apr 1' (11 at )*+

-hris . /ea♦

1)$ '*02

as$ed Apr 1' (11 at ))+*

3aushi$ 

),1122)

  41, I have always wondered this5 6  nibot Apr 1 (11 at +11

1 

 #ote that this is less about me selling a used share of AAP7 to family at a ma8or discount, and more about the pric

you can e9pect to see if you go to the stoc$ e9change where the stoc$ is readily available. :he former transaction between two people; the latter is generally an indicator of how much the company is worth to all poten

 buyers in the universe, and what the current owners of the company can e9pect to get for their investment some ti

the future. 6  fennec Apr 1 (11 at 2+1

11 Answersactiveoldest votes

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ed

Stoc$ price is an indicator about the health of the company. Increased profits <for e9ample=

will drive the stoc$ price up; e9cessive debt <for e9ample= will drive it down.

:he stoc$ price has a profound effect on the company overall+ for e9ample, a declining

share price will ma$e it hard to secure credit, attract further investors, build partnerships,

etc. Also, employees are often holding options or in a stoc$ purchase plan, so a declining

share price can severely dampen morale.

In an e9treme case, if share prices plummet too far, the company can be pressured to

reverse%split the shares, and <eventually= ta$e the company private. :his recently happened

to Playboy.

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shareimprove this answer  edited Apr 1' (11 at )*+>*

-hris . /ea♦1)$ '*02

answered

i9ee1,110

up

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vote

:he other answer has some good points, to which I(ll add this+ I believe you(re only

considering a company(s Initial Public Offering (IPO), when shares are first  offered to the

 public. An IP@ is the way most companies get a public listing on the stoc$ mar$et.

owever, companies often go to market again and again to issue/sell more

shares, after  their IP@. :hese secondary offerings don(t ma$e as many headlines as an IP@,

 but they are typical%enough occurrences in mar$ets.

hen a company goes bac$ to the mar$et to raise additional funds <perhaps to fund

e9pansion=, the value of the company(s e9isting shares that are being traded is a good

indicator of what they may e9pect to get for a secondary offering of shares.

A company about to raise money desires a higher share price, because that will permit them

to issue less shares for the amount of money they need. If the share price drops, they would

need to issue more shares for the same amount of money 6 and dilute e9isting owners(

share of the overall e&uity further.

Also, consider corporate acquisitions+ hen one company wants to buy another, instead

of the transaction being entirely in cash <maybe they don(t have that much in the ban$5=,

there(s often anequit component, which involves swapping shares of the company being

ac&uired for new shares in the ac&uiring company or merged company. In that case, the

values of the shares in the public mar$etplace also matter, to provide relative valuations for

the companies, etc.

share improve this answer  answered

-hris . /ea1)$ '*02

) 

Agree on the point about secondary offerings. :he higher they can sell those shares, the greater the share

 premium. 6 Patience Apr 1 (11 at +>*

1 

:he reverse of secondary offerings is a share buybac$ plan. In a share buybac$ plan, a company buys some of i

stoc$ bac$. :ypically, this is done when a company has a lot of cash at hand it can(t effectively use, e.g. becaus

off a subsidiary. Such a buybac$ is even more clearly affected by the share price. 6  BSalters Apr ) (11 at +2

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Shareholders get to vote for the board, the board appoints the -C@. :his ma$es the -C@ care,

which in turn ma$es everybody else wor$ing in the company care.

Also, if the company wants to borrow money a good share price, as sign of a healthy

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company, gives them more favorable conditions from lenders.

And some more points others already made.

shareimprove this answer  answered

user**00

)*11)

up

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iduciary

:hey are obligated by the rules of the e9changes they are listed with.

urthermore, there is a strong chance that people running the company also have stoc$, so it

 personally benefits them to create higher prices.

inally, maybe they don(t care about the prices directly, but by being a good company with a

good product or service, they are desirable and that is e9pressed as a higher stoc$ price. #ot

every action isbecause it will raise the stoc$ price, but because it is good for business which

happens to ma$e the stoc$ more valuable.

shareimprove this answer  answered

Br-hrister 

1>.>$ )*1

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hy do companies e9ist?

ell, the corporate charter describes why the company e9ists. Dsually the purpose is to enrich

the shareholders. :he owners of a company want to ma$e money, in other words.

:here are a number of ways that a shareholder can ma$e money off a stoc$+

• the company can give the shareholder some of its profits <dividends= as cash

• the company can sell itself to another company, and pay the shareholder cash

• the company can buy bac$ some of its own shares, and pay the shareholder cash

• the shareholder can sell the shares to someone else for cash.

• the other guy has to e9pect to ma$e money off the stoc$ somehow too, or why

would he buy it?

As such, maintaining the stoc$ price and dividend payouts are generally the number one

concern for any company in the long term. Bost of the company(s business is going to be

directed towards ma$ing the company more valuable for a future buyout, or more valuable in

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terms of what it can pay its shareholders directly.

 #ote that the company doesn(t always need to be worried about the specifics of the day%to%day

moves of the stoc$. If it $eeps the finances in line % solid profits, margins, earnings growth and

the li$e % and can credibly tell people that it(s generally a valuable business, it can usually shrugoff any medium%term blips as mar$et craEiness. Some companies are more e9plicitly long%term

about things than others <e.g. Fer$shire athaway basically tells people that it doesn(t care all

that much about what happens in the short term=.

@f course, companies are abstractions, and they(re run by people. :o ma$e the people running

the company worry about the stoc$ price, you give them stoc$. @r stoc$ options, or something

li$e that. A ma8or e9ecutive at a big company is li$ely to have a significant amount of stoc$. If

the company does well, he does well; if it does poorly, he does poorly. Gespite a few

limitations, this is really a powerful incentive.

If a company is losing a lot of money, or if its profits are falling so it(s 8ust losing a lot of

its value as a business, the owners <stoc$holders= tend to get upset, and may vote in new

management, or launch some sort of shareholder lawsuit.

And, as previously noted, to raise funds, a company can also issue new shares to the mar$et as a

secondary offering as well <and they can issue fewer shares if the price is high % meaning that

whatever the company is worth afterward, the e9isting owners own proportionally more of it=.

share improve this answer  edited Apr 1 (11 at >+>' answered Apr 1 (11 at >+

fennec

',)1>1'

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:he fact you are as$ing this &uestion, the number of up votes, uncovers the real cause of the

 ban$ing crisis.

Answers which mention that shareholders will fire a public company board are on the bottom. It

is obvious that a company owners are interested in company value. And should have direct andeasy impact on a directors board if management doesn(t increase shareholders wealth.

!ith large number of passi"e shareholders and current stock market sstem that impact

is "er limited# $ence our question#

So ban$ directors, upper management aren(t that interested in company value. :hey are mostly

interested in theirs bonuses, their wealth increase, not shareholders. And that(s the real problem

of capitalism. Public companies slowly drift to function li$e companies in former socialistic

countries. :hese is no owner, everything is owned by a nation.

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share improve this answer  answered Apr 1 (11 at 2+>

Hreg Gan11

1 

C9cellent point, most of the bonuses to top management are as stoc$ options or are specifically tied to the financial

growth achieved. At times if the outloo$ of the -C@ is short lived, he may ta$e short term decission that benefit as

 profits hence more bonusJ rather than a long term view 6  Gheer  Apr 1 (11 at 1*+1'

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:he most significant reason is that if the board of directors of a company neglects the stoc$

value, the stoc$holders will vote them out of their 8obs.

shareimprove this answer  answered Apr 1 (11 at *+

 #eil H

1*>

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@riginally, stoc$s were ownership in a company 8ust li$e any other business% you e9pected to

ma$e a profit from your investment, which is what we call dividends to stoc$ holders. Since

these dividends had real value, the stoc$ price was based on what this return rate was, factoring

in what it might be e9pected to be in the future, etc.

 #owdays many companies never issue any dividends, so you have to consider the full value of

the company and what benefit could be gained by another company if it were to ac&uire it. the

mar$et will li$ely ad8ust the share price to factor in what the value of the company might be to

an ac&uirer.

Fut otherwise, some companies today trading at an astronimical price, and which nevers pays a

dividend% chal$ it up to mar$et stupidity. In this investor(d mind, there is no logical reason for

these prices, e9cept based on the idea that someone else might pay you more for it later... for

what reason? I can(t figure it out. :a$e it bac$ to it(s roots and imagine pitching a new business

idea to you uncle to invest in% it will ma$e almost nothing compared to it(s share price, and even

what it does ma$e it won(t pay anything to him for his investment. hy wouldn(t he 8ust laugh

at you?

shareimprove this answer  answered Apr 1 (11 at >+10

 boomhauer 

111)

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Fecause you can pitch to him that ) months later, he can sell his share to your rich dad for twice as much as he bou

them from you. ell, at least that(s the speech. 6 Sylver  Apr 1 (11 at 1*+*

hat? -ompanies issue dividends5 And stoc$ is still ownership5 6  Br-hrister  ♦ Apr 1 (11 at 1+0

Br-hris, there are ma8or companies that have never, and never intend to, issue any dividends. 6   boomhauerat 1+1>

) 

It(s the ability to pay dividends, not the intent , which gives shares their value. A ban$rupt company may have every

intent of the world, and still be worthless. 6 BSalters Apr ) (11 at +>>

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Aside of the other <mostly valid= answers, share price is the most common method of valuating

the company.

ere is a bogus e9ample that will help you understand the general point+

•

-ompany A with 1 Billion shares at !) is worth !) Billion

• -ompany F with 1 Billion shares at !) is worth !) Billion

 #ow, suppose that -ompany A wants to borrow !) Billion from a ban$... #ot a chance.

-ompany F? #ot a problem.

Same situation when trying to raise new funds for the mar$et or when trying to sell the

company or to ac&uire another 

share improve this answer  answered Apr 1 (11 at 1*+)

Sylver 

1*)>

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:he main reason is that a public company is owned by its share holders, and share holders

would care about the price of the stoc$ they are owning, therefore the company would also

care, because if the price go down too much, share holders become angry and may vote to oust

the company(s management.

share improve this answer  answered Apr 1 (11 at 1+*

3o3o

1111

up

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O"erpriced shares%

• -heaper to raise new capital through secondary share offerings or debt using shares

as a security.

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• &ends off hostile take o"ers, since the company is too dear. hen a company is

ta$en over it needs only one set of management and top management of the company

that is ta$en over looses 8obs % no one wants to loose a 8ob.

• Shareholders love to see share price grow % sale brings them profit, secures 8obs for

company management.

• Shares are used as a currency during ac&uisitions, if company shares are overpriced

that means they can buy another company on the cheap % paying with the overpriced

shares.

'nder"alued shares%

• Bore e9pensive to raise additional capital through secondary share offerings % for the

same amount of capital the management has to offer a bigger chun$ of the company;

have to offer bigger chun$ of a company as a security as well.

• Ba$es company vulnerable to hostile ta$e overs, company is undervalues % ma$es it

an attractive bargain. @nce the company is ta$en over top management ill almost

certainl loose obs.

• alling price ma$es shareholders unhappy % they will vote management out.

• Ba$es difficult to ac&uire other companies.