The only problem is that to a certain extent the value of stock is irrelevant to the actual company. The company can’t cash in on the stock price for the most part, and it ahs nothing to do with the companies performance except to the degree the market notices how the company does. Usually, this means that if the company does well, the stock goes up. However, because stock prices (whether someone wants the stock) has as much or more to with expectations, really good news can result in low stock price if investors wanted even more. Conversely, if you wath the markets terrible business news sometimes results in a better stock price, if investors thought it was going to be much worse.
Companies do generally want high stock price for a number of reasons (mostly to please investors), but whether or not such a thing is relevent varies. Firms that pay dividends are more stable, since they have a more objective valuation.
I always wanted to start a totally empty company. It wouldn’t have any assets or value at all, and see if I couldn’t persuade peope to treat it as an index of value of a certain sector of the economy.
Presumably, though, that not-as-good-as-expected news was preceded by a period of steady rise, from the expectations of good news, such that the net effect of the news was still positive, right? And likewise for the not-as-bad-as-expected news.
This is always where I become confused. I don’t understand why a company cares what its stock price is once the shares are sold in the IPO. Is it because some of the share holders own such a large percentage of shares that they have a legal right to say what the company should do? Maybe that’s what you mean when you say companies want high stock prices to please investors.
But then you seem to be saying that the stock price isn’t always relevant to a company. In which case, why should they care what their price is? Or do they not care?
The stock price isn’t always particularly relevant to how well the company is doing. However, the shareholders own the company, and ultimately control the direction of the company through the board of directors. Shareholders today are typically concerned more with the stock price, as it represents the value of their investment. So ultimately the executives of the company are concerned with the share price because the shareholders elect the board of directors, and the board of directors appoints the executives.
For an example of this in action, see the Microsoft-Yahoo talks. Many Yahoo shareholders were upset that the company wouldn’t sell itself to Microsoft because, despite whatever issues Yahoo believed there were with the deal, it represented a good return on the investment made by the shareholders. Yahoo has basically sworn up and down that it can do better on its own, and it’s resulted in a lot of pressure on management, including an attempt by one prominent investor (Carl Icahn) to replace the board, because not everyone believes Yahoo can do better.
Target was also recently pushed by someone who bought up a lot of their stock to get rid of their in-house credit card operations. I just couldn’t figure out before where the leverage was. But if a significant shareholder can replace a board, then it makes sense.
That’s the real issue. Companies don’t care whether you or I buy the stock. They care when large investors buy up millions of shares. If you’re putting tens of millions of your dollars into my company as an investment, then you’re going to get a say in how it’s run. (Other people need to know this as well, which is why there is a rule that purchasing more than 5% of the stock of a company must be publicly disclosed.)
A recurring criticism of the modern stock market is that most companies are now influenced by short-term investors who buy up large quantities of stock seeking high short-term returns. (High normally meaning more than 10% annually.) There’s a long running debate over whether companies are better for doing whatever it takes to keep making these returns (whatever it takes meaning laying off workers, slashing budgets, selling underperforming subsidiaries) or whether companies no longer take the time to do proper r&d and build product lines because they are so focused on the next quarter’s earnings.
Companies also frequently do new issues of stocks to attract more investment. That’s another reason why the stock price is so important on a continuing basis. Nobody offers an initial run of a billion stocks, but many companies have far more than a billion shares in circulation. Some of these come from stock splits, but many are from new issues.
A high rate of return is reflected in the stock price because investors will bid up the shares in order to buy into a good investment. They will also tend to leave the management alone when the stock is rising. But it can become self-reinforcing. A stock’s shares might be bid higher because of perceived future growth, even when current profits are negligible or negative. That’s how the internet stock bubble broke. Stock prices did not reflect any current reality but only future hopes. When those hopes went away stock prices fell 90% or more in a comparative instant. Companies lost all ability to attract future investments and went under.
It depends completely on what happened, what was expected, and what people think it means. Say company X is developing a drug to cure ingrown toenails. Based on some early test results, investors have reason to believe it’s going to be the best ingrown toenail drug ever and could sell billions. The stock shoots up based on the previous trial results and then goes higher and higher as the company prepares to report the big news.
Turns out the drug works and doesn’t kill anybody, but it doesn’t work that well. It’s got some side effects and it’s going to be more expensive than stuff that’s already out there. So it’s going to be hard for X to find a partner to help sell the stuff, and there’s not much of a reason for doctors to prescribe it over something else, or a reason for patients to ask for it instead of whatever they were using before.
The company may not be able to afford to develop some other products because now they don’t have a lot of revenue. They bet too big on this drug, now they have a lot of expenses and no way to pay for them. List of problems goes on, but the stock could very well end up lower than it started- at least in the short term.
There are many, many funds that do this kind of thing - although they are not empty companies, of course; they hold shares of many different companies.
And of course the history of the stock market is filled with so many empty companies, many of them holding companies that did little but hide the ownership and assets of their subsidiaries, that a hint of being an empty company today would bring the SEC down on you like Dirty Harry. It’s far easier on you legally to lose billions of dollars of stockholders’ value than be an empty company. Check any good book on business history.
In case I was not clear, I was saying there are many funds that are supposed to represent particular sectors of the economy, as smiling bandit’s hypothetical shell corporation would.
Actually, there is a special-purpose acquisition company, which is sort of what you’re describing (although a SPAC has assets in the form of the proceeds of the IPO). The Wikipedia link explains it better than I can, but basically it’s when someone forms a company with the purpose of using the invested capital to buy another company (unspecified initially).
Could someone enlarge on this? How does the floor specialist decide on the price? Is the difference between the the bid and the ask his margin? (I have a vague memory of hearing that somewhere.)
