Total Posts:8|Showing Posts:1-8
Jump to topic:

Can anyone explain the value of stocks to me?

Khaos_Mage
Posts: 23,214
Add as Friend
Challenge to a Debate
Send a Message
3/24/2014 11:45:22 AM
Posted: 2 years ago
This is more of an accounting question in a way, but...

Why do companies care so much about the value of their stock?
Outside of stock options and bonuses, and the future issuance of stock, why does a company care? They have their equity.
My work here is, finally, done.
blaze8
Posts: 164
Add as Friend
Challenge to a Debate
Send a Message
3/24/2014 12:59:17 PM
Posted: 2 years ago
At 3/24/2014 11:45:22 AM, Khaos_Mage wrote:
This is more of an accounting question in a way, but...

Why do companies care so much about the value of their stock?
Outside of stock options and bonuses, and the future issuance of stock, why does a company care? They have their equity.

Isn't stock itself a form of equity? Shareholder equity, I think? Anyway, when someone buys stock, they become a shareholder. Common stock usually comes with a provision for dividends to be provided to the shareholder. Dividends come from profits. Thus, the value of a stock is linked partially to the dividends paid to the shareholder, and strong dividends attracts more shareholders and can be taken as a sign of a healthy company under it's current management. If stock values decrease, the threat of a merger or acquisition looms, and no one in a high-level management position or the Board of Executives wants to lose their job. Thus, the company has a vested interest in raising the value of it's stocks.

This is one of the theories the Chicago School proposes for solving the problems of market power. To the Chicago School, monopolies do not last in the long run, and thus, they believe Market power is not permanently consolidated. Hence, they believe that promoting shareholder capitalism will lead to increased technical efficiency, and the threat of a merger is a competitive force in Capitalism.

I'm not quite sure if I've answered your question though lol.
"For I am a sinner in the hands of an angry God. Bloody Mary full of vodka, blessed are you among cocktails. Pray for me now and at the hour of my death, which I hope is soon. Amen."-Sterling Archer
DanT
Posts: 5,693
Add as Friend
Challenge to a Debate
Send a Message
3/24/2014 6:57:15 PM
Posted: 2 years ago
At 3/24/2014 11:45:22 AM, Khaos_Mage wrote:
This is more of an accounting question in a way, but...

Why do companies care so much about the value of their stock?
Outside of stock options and bonuses, and the future issuance of stock, why does a company care? They have their equity.

Several reasons;
1.) Shareholders are the owners of a corporation, and a corporation is a legal person representing the collective shareholders. The CEO is the figurehead of the corporation, so anything business related that the CEO does is considered an act by the corporation, unless the CEO is acting against the interest of the shareholders; in which case the CEO would be acting against the corporation.
2.) Voting shareholders (those who own common stock) determine corporate policy and who the board of directors are, therefore they also indirectly determine who the CEO will be.
3.) Stock represents a share in the ownership of the corporation; therefore shares are a personal asset for the shareholders that can be bought or sold. When the price per share falls a single share is worth less. If the price of shares decrease , but the number of shares remain constant, the company's worth decreased. If prices are too high, it would be hard to liquidate company shares, and thus harder to collect on your investment. By issuing a stock split, you can multiple the number shares in order to bring down the price, without devaluing the company.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
slo1
Posts: 4,308
Add as Friend
Challenge to a Debate
Send a Message
3/25/2014 7:39:51 AM
Posted: 2 years ago
A couple to add why a company would want a strong share price.

-The CEO's job is on the line if they don't perform and raise stock prices. These days there is so much pressure to beat earnings each quarter that it in a way becomes the driver of CEO performance. Some would say that pressure got so great that with the lack of oversight it is the pressure which has caused many a CEO or CFO to be dishonest. That pressure comes from the owners of the company (share holders) and the board.

- Want a strong share price so you can always keep an option of obtaining financing by issuing more shares if needed.
wrichcirw
Posts: 11,196
Add as Friend
Challenge to a Debate
Send a Message
3/25/2014 7:42:18 PM
Posted: 2 years ago
At 3/24/2014 11:45:22 AM, Khaos_Mage wrote:
This is more of an accounting question in a way, but...

Why do companies care so much about the value of their stock?
Outside of stock options and bonuses, and the future issuance of stock, why does a company care? They have their equity.

Stocks are the equity component of a business.

There are two components as to how a business operation is financed - debt and equity. Debt is simple - it's bonds and loans and such.

Equity consists of both "paid-in capital" (i.e. the initial investment) and "retained earnings" (i.e. the profit the business actually makes and retains for future use instead of giving it back to shareholders via dividends).

If this equity component is valuable, that means that the initial investment has made a good return (expressed as a rate of return), and that return will usually appear on the books as "retained earnings" that are orders of magnitude larger than "paid in capital".

On the stock market, you have to first understand what is the general purpose of the stock market. More than just ticker symbols, it's also how companies figure out what their "market price" is, i.e. basically what the company would sell for if the owners wanted to sell the company (it's a market after all, yes?). It's also the price at which "the market" values the company's earnings and growth potential, which will invariably be some sort of derivative of what the company actually made. This is important because if the company requires further capital in order to grow, higher growth potential will equate to better prospects for the company, which means that they can raise more capital without giving away as much equity as they otherwise would to new owners (which would make the current owners very happy).

For example, let's say you have company A that makes $100/month consistently, and then you have company B that made $10/month in its first couple years, but had astounding, exponential growth and currently makes $200/month. Is company B's earnings stream worth twice as much as company A's? Typically the answer is no, it's worth much more than that. So, for outside investors to buy more shares of company B, they'd have to typically pay more than twice as much for company B shares than company A's shares.

Both company A and company B are looking for more investors so that they can further expand their operations. New investors will pay (much) more to participate in company B's growth potential, and so company B will have a much easier time attracting investors by selling additional shares on the market.

For the company, this is the primary purpose as to why they would want to list on a public stock exchange...to find more investors for their business. In fact, how the company went public involved listing a bunch of shares that represented a partial/full ownership of the company.

A good book that goes into this better than I probably have:

http://www.amazon.com...
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
wrichcirw
Posts: 11,196
Add as Friend
Challenge to a Debate
Send a Message
3/25/2014 7:56:47 PM
Posted: 2 years ago
At 3/25/2014 7:39:51 AM, slo1 wrote:
A couple to add why a company would want a strong share price.

-The CEO's job is on the line if they don't perform and raise stock prices. These days there is so much pressure to beat earnings each quarter that it in a way becomes the driver of CEO performance. Some would say that pressure got so great that with the lack of oversight it is the pressure which has caused many a CEO or CFO to be dishonest. That pressure comes from the owners of the company (share holders) and the board.

- Want a strong share price so you can always keep an option of obtaining financing by issuing more shares if needed.

Ok, this is a much more succinct answer, lol.

Anyway, most important to corporate management is that their jobs are on the line, and they work for shareholders who demand an adequate rate of return on their investment.

If those shareholders are not happy (and in the rare case that they have a cohesive voice), they can sack the management team. Typically what would occur is that a vulture capitalist will swoop in and buy up a large amount of voting shares of a poorly-performing stock, vote out the management team and replace it with one that they favor with the aim of realizing the company's "true market value".

So, in the aim of self-preservation, companies care a lot about their share prices.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
twocupcakes
Posts: 2,748
Add as Friend
Challenge to a Debate
Send a Message
3/26/2014 12:14:48 PM
Posted: 2 years ago
It is the job of a corporation to increase the share price. Shareholders own the company and put pressure on the company to increase the share price.

However, I agree that there is almost too much pressure for companies to increase the share price. I think I remember reading a study sometime about how non public companies are run better in some way in the long run as they have less pressure on share price.