published on 18 February 2023
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?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.
Number 1. CEO
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 the CEO's wealth.
Number 2. Management team
Even if the CEO doesn't own a big chunk of shares of the company, anyway, he or she, together with the management team, is interested in share price because of particular reasons.
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.
C. Many times employees get compensation via stock options. So the higher the stock price goes, the more financial benefits they will have.
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.
Number 3.Funding
There are two 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, but that is usually a rare thing. Most stocks selling 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 can borrow the money.
Number 4. Business operations
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 a higher share price helps 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 next reason I want to mention is that the lower the share price, the easier it is to buy out the company.
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 four main reasons show that companies need investors. And by investing in stocks, we support those companies to make their vision and mission become a reality, which helps them to make the world a better place. By the way, companies can artificially increase their stock price through share buyback programs.
Key Takeaways:
1. Companies benefit from a rising stock price due to the interests of the CEO, management team, and employees.
2. Companies can use a higher stock price to raise capital and borrow money from banks.
3. A higher stock price can help with business operations, such as buying other companies and partnering with other companies.
4. Companies can artificially increase their stock price through share buyback programs.
