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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, none of whom are directly related to the company.

E.g. if I sell X an iPhone for $100, why should I care if X is selling the iPhone to Y for 1 dollar or 1000 dollars? I have got my $100, so I need not bother. No?

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+1, I have always wondered this! –  nibot Apr 19 '11 at 4:11
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Note that this is less about me selling a used share of AAPL to family at a major discount, and more about the prices you can expect to see if you go to the stock exchange where the stock is readily available. The former is a private transaction between two people; the latter is generally an indicator of how much the company is worth to all potential buyers in the universe, and what the current owners of the company can expect to get for their investment some time in the future. –  fennec Apr 19 '11 at 6:01

12 Answers 12

up vote 39 down vote accepted

Stock price is an indicator about the health of the company. Increased profits (for example) will drive the stock price up; excessive debt (for example) will drive it down.

The stock price has a profound effect on the company overall: for example, a declining share price will make it hard to secure credit, attract further investors, build partnerships, etc. Also, employees are often holding options or in a stock purchase plan, so a declining share price can severely dampen morale.

In an extreme case, if share prices plummet too far, the company can be pressured to reverse-split the shares, and (eventually) take the company private. This recently happened to Playboy.

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Why get involved at all with stock markets if it wrests control of your company from you? –  blarg Sep 9 at 10:33

The 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 IPO is the way most companies get a public listing on the stock market.

However, companies often go to market again and again to issue/sell more shares, after their IPO. These secondary offerings don't make as many headlines as an IPO, but they are typical-enough occurrences in markets.

When a company goes back to the market to raise additional funds (perhaps to fund expansion), the value of the company's existing shares that are being traded is a good indicator of what they may expect 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 – and dilute existing owners' share of the overall equity further.

Also, consider corporate acquisitions: When one company wants to buy another, instead of the transaction being entirely in cash (maybe they don't have that much in the bank!), there's often an equity component, which involves swapping shares of the company being acquired for new shares in the acquiring company or merged company. In that case, the values of the shares in the public marketplace also matter, to provide relative valuations for the companies, etc.

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Agree on the point about secondary offerings. The higher they can sell those shares, the greater the share premium. –  Patience Apr 19 '11 at 0:53
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The reverse of secondary offerings is a share buyback plan. In a share buyback plan, a company buys some of its own stock back. Typically, this is done when a company has a lot of cash at hand it can't effectively use, e.g. because it sold off a subsidiary. Such a buyback is even more clearly affected by the share price. –  MSalters Apr 29 '11 at 9:46
    
@MSalters, But exactly how does buying back the share helps the company grow? –  Pacerier Nov 13 '13 at 0:52
    
@Pacerier A share buyback does not help the company grow. Rather, a buyback can be used to return cash to shareholders when the company can't effectively use the cash. –  Chris W. Rea Nov 13 '13 at 1:36
    
@ChrisW.Rea, So a share buyback is actually not beneficial to a company and would cause the stock to go down.... –  Pacerier Nov 13 '13 at 1:51

Shareholders get to vote for the board, the board appoints the CEO. This makes the CEO care, which in turn makes everybody else working in the company care.

Also, if the company wants to borrow money a good share price, as sign of a healthy company, gives them more favorable conditions from lenders.

And some more points others already made.

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Specifically, if the board is sufficiently unhappy with the stock price, they can fire/replace the CEO. –  Craig Walker Mar 5 at 20:57

Fiduciary

They are obligated by the rules of the exchanges they are listed with.

Furthermore, there is a strong chance that people running the company also have stock, so it personally benefits them to create higher prices.

Finally, 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 expressed as a higher stock price. Not every action is because it will raise the stock price, but because it is good for business which happens to make the stock more valuable.

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Why do companies exist?

Well, the corporate charter describes why the company exists. Usually the purpose is to enrich the shareholders. The owners of a company want to make money, in other words.

There are a number of ways that a shareholder can make money off a stock:

  • 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 back 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 expect to make money off the stock somehow too, or why would he buy it?

As such, maintaining the stock price and dividend payouts are generally the number one concern for any company in the long term. Most of the company's business is going to be directed towards making the company more valuable for a future buyout, or more valuable in terms of what it can pay its shareholders directly.

Note that the company doesn't always need to be worried about the specifics of the day-to-day moves of the stock. If it keeps the finances in line - solid profits, margins, earnings growth and the like - and can credibly tell people that it's generally a valuable business, it can usually shrug off any medium-term blips as market craziness. Some companies are more explicitly long-term about things than others (e.g. Berkshire Hathaway basically tells people that it doesn't care all that much about what happens in the short term).

Of course, companies are abstractions, and they're run by people. To make the people running the company worry about the stock price, you give them stock. Or stock options, or something like that. A major executive at a big company is likely to have a significant amount of stock. If the company does well, he does well; if it does poorly, he does poorly. Despite 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 just losing a lot of its value as a business, the owners (stockholders) 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 market 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 existing owners own proportionally more of it).

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The most significant reason is that if the board of directors of a company neglects the stock value, the stockholders will vote them out of their jobs.

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The fact you are asking this question, the number of up votes, uncovers the real cause of the banking 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 and easy impact on a directors board if management doesn't increase shareholders wealth.

With large number of passive shareholders and current stock market system that impact is very limited. Hence your question.

So bank directors, upper management aren't that interested in company value. They 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 like companies in former socialistic countries. These is no owner, everything is owned by a nation.

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Excellent point, most of the bonuses to top management are as stock options or are specifically tied to the financial growth achieved. At times if the outlook of the CEO is short lived, he may take short term decission that benefit as more profits [hence more bonus] rather than a long term view –  Dheer Apr 19 '11 at 13:18

The main reason is that a public company is owned by its share holders, and share holders would care about the price of the stock 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.

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Overpriced shares:

  • Cheaper to raise new capital through secondary share offerings or debt using shares as a security.

  • Fends off hostile take overs, since the company is too dear. When a company is taken over it needs only one set of management and top management of the company that is taken over looses jobs - no one wants to loose a job.

  • Shareholders love to see share price grow - sale brings them profit, secures jobs for company management.

  • Shares are used as a currency during acquisitions, if company shares are overpriced that means they can buy another company on the cheap - paying with the overpriced shares.

Undervalued shares:

  • More expensive to raise additional capital through secondary share offerings - for the same amount of capital the management has to offer a bigger chunk of the company; have to offer bigger chunk of a company as a security as well.

  • Makes company vulnerable to hostile take overs, company is undervalues - makes it an attractive bargain. Once the company is taken over top management will almost certainly loose jobs.

  • Falling price makes shareholders unhappy - they will vote management out.

  • Makes difficult to acquire other companies.

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Aside of the other (mostly valid) answers, share price is the most common method of valuating the company.

Here is a bogus example that will help you understand the general point:

  • Company A with 10 Million shares at $2 is worth $20 Million
  • Company B with 10 Million shares at $20 is worth $200 Million

Now, suppose that Company A wants to borrow $20 Million from a bank... Not a chance. Company B? Not a problem.

Same situation when trying to raise new funds for the market or when trying to sell the company or to acquire another

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Originally, stocks were ownership in a company just like any other business- you expected to make a profit from your investment, which is what we call dividends to stock holders. Since these dividends had real value, the stock price was based on what this return rate was, factoring in what it might be expected to be in the future, etc.

Nowdays 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 acquire it. the market will likely adjust the share price to factor in what the value of the company might be to an acquirer.

But otherwise, some companies today trading at an astronimical price, and which nevers pays a dividend- chalk it up to market stupidity. In this investor'd mind, there is no logical reason for these prices, except based on the idea that someone else might pay you more for it later... for what reason? I can't figure it out. Take it back to it's roots and imagine pitching a new business idea to you uncle to invest in- it will make almost nothing compared to it's share price, and even what it does make it won't pay anything to him for his investment. Why wouldn't he just laugh at you?

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Because you can pitch to him that 2 months later, he can sell his share to your rich dad for twice as much as he bought them from you. Well, at least that's the speech. –  Sylver Apr 19 '11 at 13:03
    
What? Companies issue dividends! And stock is still ownership! –  MrChrister Apr 19 '11 at 14:07
    
MrChris, there are major companies that have never, and never intend to, issue any dividends. –  boomhauer Apr 22 '11 at 14:15
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It's the ability to pay dividends, not the intent, which gives shares their value. A bankrupt company may have every intent of the world, and still be worthless. –  MSalters Apr 29 '11 at 9:55

Because it's a good indicator of how much their asset worth. In oversimplified example, wouldn't you care how much your house, car, laptop worth? Over the course of your life you might need to buy a bigger house, sell your car etc. to cope with your financial goal / situation. It's similar in company's case but with much more complexity.

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