Why Do Companies Care So Much About Their Share Prices?
When you buy shares in a company, you are generally buying shares from a shareholder who is willing to sell those shares. For example if you buy $1000 worth of shares of Walmart, that $1000 goes to the seller of those shares not to Walmart. Why then should a company care about its stock price? A company only gets money from the initial public offering (when it’s shares first go on sale), subsequent buying and selling of shares occurs between investors. Why then do companies put such a strong emphasize on share prices?
Here are the reasons why share price is so important to companies:
- The number of shares outstanding multiplied by the share price gives you market capitalization, in other words it tells you how much a company is worth. A company with a large market capitalization will be able to borrow more money, which they can use to expand their business.
- Higher market capitalization also ensures broader coverage of their stock by analysts. This essentially mounts to free publicity for the company.
- Companies also retain some shares, or create new ones when needed. Those shares can be sold to the public at their current share price. This allows companies to raise more money if needed.
- Typically executives in the company also own shares in the company, so it is in their best interest to ensure that stock price continues to rise.
This great article listed below provides additional reasons why companies care so much about their share price: http://www.investopedia.com/articles/basics/03/020703.asp#axzz1vYyHzq6G
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