Stupid question about stock shares

Discussion in 'Stocks' started by BillySimas, Feb 7, 2012.

  1. As I understand it, when a company goes public, they sell off shares of their company on an exchange to investors. After the IPO is finished, the shares from then on are traded between third parties. That's to say, buyers and sellers just trade the shares between each other and the company isn't involved anymore. If that's the case (and if it's not, please correct me), how do companies benefit from their stock price going up? I'm sure they do benefit but I just don't know how. I can see why employees that own shares would benefit but I don't understand why the price would matter to the company if they have already sold the shares in the IPO. Thanks in advance.
  2. Well one of the main technical reasons is that stock price can be tied to loans. I.e. say company A is trading at $100 a share takes out a loan, well the bank can require company A to put up more collateral if the stock drops below say $50 a share. They might also call in the loan if it drops below $30 a share. This was how many of enrons loans were structured and which ultimately put the final nail in the coffin when their stock dropped below $40

    I'm talking strictly company wide here and not personal . I.e. negating bonuses or stock options tied to stock price
  3. Thanks, that makes sense. If anyone else has additional examples, that would be great.

  4. A higher share price also thwarts off Hostile Takeovers.
  5. Company founders may own large amounts of stock. Only a fraction of the stock may be sold in the public offering. There may be more public offerings, and the greater the price of the stock, the more money can be obtained from the sale.
  6. wilddog


    Sinker is spot on, it gives the owners opportunity to cash out. They may be restricted for a few years, after that happy days
  7. rmorse

    rmorse ET Sponsor

    I believe your missing the point. A corporation is owned by the stock holders. The stock holders choose a board of directors to run the company for the stock holders. The board and the executives of the company have a fiduciary duty to the share holders.

    They get compensated (in theory) based on how well they do that. The typical expression of how well they run the company is the stock price which is based on share holder perception of the value of the company.

  8. wilddog


    And very often the owners are major shareholders and have a seat on the board and usually run the company
  9. Also a lot of times a company will have say (just for example) will have 1,000,000 "authorized" shares. OF that 1,000,000 shares there are often times issued and unissued shares, so just for example assume a half million of each, the issued shares go to the public for trading, which will ultimately set the price. I'm not 100% in terms of how the rest, (unissued securities) are valued or if they are owned by the company or what. But I know that many times stock is issued in this manner.
  10. Many companies buy back shares as well. This increases their percentage ownership, which helps keep outside directors doing their bidding. Or, in the case of smaller, listed companies, the original owners simply want to have the larger ownership share to once again, take it private. Just an example.

    #10     Feb 8, 2012