When you buy stocks your money goes to another investor who sells them, then why do companies care about their stock price if they don’t get the money?
Hi, I'm Henrikh. In this article, I'll describe how companies benefit from their rising stock price.
Ok, let’s start.
Almost every time you buy shares you buy from another investor not from the company itself. And whoever sells the shares gets the money. So why do companies care about their stock price? I will bring 4 main reasons why companies need their stock price to rise.
#1. CEO - owner-oriented
In many cases, the CEO owns a big chunk of shares of the company. This means the CEO is directly interested in the share price, as the higher the share price is the higher is the CEO’s wealth.
#2. Management - Career / Blame / Compensation / Ego
Even if the CEO doesn’t own a big chunk of shares, anyway he or she together with the whole management team is interested in share price, because of particular reasons.
Reason A - they need to grow the company in order to gain career growth, to have a history that while they were a board member the market capitalization of the company grew a lot.
Reason B - they don’t want to be blamed by investors when the prices drop.
Reason C - many times employees get compensation via stock options so the higher the stock price goes the more financial benefits they will have.
And Reason D - managers are also human and have their ego part to feel good when the company market capitalization grows so that they can even show off in their network. So these reasons show that the management is directly interested in the stock price.
#3. Funding - Raise Capital / Borrow
There are 2 cases when companies sell their shares. The first case is when they go public, so-called the IPO, the second case is when they decide to expand the number of shares of the company to raise new capital from investors, which usually is a rare thing. Most stocks in the market are by investors, not the company itself. So anyway, if they need funding then the higher the price the fewer shares the company needs to add. And the other way to fund the company is to borrow from banks. And again, the higher the stock price, the more money they can borrow from the banks, and also the easier they will borrow the money.
#4. Business Operations - Investments / Partnership / Buyout Risk
Many times companies buy other companies and very often they pay for it with shares, not with money. So the higher the stock price - the fewer shares they will give to buy other companies.
Another way higher share price helps the business operations is that partnering with other companies is easier when the market capitalization of the company is higher, rather than lower. So when the company valuation is high more companies want to partner with that company. And the other thing I want to mention is that the lower the share price the easier it is to buy out the company. A buyout is an investment transaction by which the ownership equity of a company or a majority share of the stock of the company is acquired. So when a company is bought out many things can be changed in the company, including the staff. So companies try to avoid it.
Those 4 main reasons show that companies need investors and by investing in stocks we support those companies to make their mission and vision become a reality which helps them make the world a better place. BTW companies can also artificially increase their stock price by share buyback programs.
When you buy stocks your money goes to another investor who sells them, then why do companies care about their stock price if they don’t get the money?
Hi, I'm Henrikh. In this article, I'll describe how companies benefit from their rising stock price.
Ok, let’s start.
Almost every time you buy shares you buy from another investor not from the company itself. And whoever sells the shares gets the money. So why do companies care about their stock price? I will bring 4 main reasons why companies need their stock price to rise.
#1. CEO - owner-oriented
In many cases, the CEO owns a big chunk of shares of the company. This means the CEO is directly interested in the share price, as the higher the share price is the higher is the CEO’s wealth.
#2. Management - Career / Blame / Compensation / Ego
Even if the CEO doesn’t own a big chunk of shares, anyway he or she together with the whole management team is interested in share price, because of particular reasons.
Reason A - they need to grow the company in order to gain career growth, to have a history that while they were a board member the market capitalization of the company grew a lot.
Reason B - they don’t want to be blamed by investors when the prices drop.
Reason C - many times employees get compensation via stock options so the higher the stock price goes the more financial benefits they will have.
And Reason D - managers are also human and have their ego part to feel good when the company market capitalization grows so that they can even show off in their network. So these reasons show that the management is directly interested in the stock price.
#3. Funding - Raise Capital / Borrow
There are 2 cases when companies sell their shares. The first case is when they go public, so-called the IPO, the second case is when they decide to expand the number of shares of the company to raise new capital from investors, which usually is a rare thing. Most stocks in the market are by investors, not the company itself. So anyway, if they need funding then the higher the price the fewer shares the company needs to add. And the other way to fund the company is to borrow from banks. And again, the higher the stock price, the more money they can borrow from the banks, and also the easier they will borrow the money.
#4. Business Operations - Investments / Partnership / Buyout Risk
Many times companies buy other companies and very often they pay for it with shares, not with money. So the higher the stock price - the fewer shares they will give to buy other companies.
Another way higher share price helps the business operations is that partnering with other companies is easier when the market capitalization of the company is higher, rather than lower. So when the company valuation is high more companies want to partner with that company. And the other thing I want to mention is that the lower the share price the easier it is to buy out the company. A buyout is an investment transaction by which the ownership equity of a company or a majority share of the stock of the company is acquired. So when a company is bought out many things can be changed in the company, including the staff. So companies try to avoid it.
Those 4 main reasons show that companies need investors and by investing in stocks we support those companies to make their mission and vision become a reality which helps them make the world a better place. BTW companies can also artificially increase their stock price by share buyback programs.
