stock prices and investment in company

When the stock price of a company increases, presumably because people are buying the stock, does this provide any investment capital to the company? Note I am not talking about when the company issues stock, what happens to the company when existing stock is traded and increases in price? Investors benefit, but does the company?

Of course they can then go ahead and issue more stock at the higher price, but how does the company benefit otherwise short of such a relatively rare event? Do they use stock that they haven’t issued as collateral for loans?

Thanks

The company gets no direct benefit. Only the shareholders, who run the Board of Directors, who hire, fire, and compensate the CEO.

It increases cash on the asset side and increases common stock of shareholders equity as a claim against the assets of the company on the other side in double entry accounting. Probably not too helpful, I just started taking the course; I am certain there is a real accountant or CPA on this board who can give you a better answer though.

It is a good question in the abstract sense. Once stock is issued, the shares are basically like collectible trading cards with a certain company’s name on them. There is absolutely nothing tying them back to the originating company other than the speculation that someone else will want to buy them for more later. In theory, let’s say Apple is out competing all of their competitors yet no one wants to but their stock for whatever reason. The share price will will plummet no matter how well or how badly the company is doing. Apple itself gets nothing from the shares that are traded on the market.

In the real world, it is a little different. One factor is dividends if the are given. Shareholders get a share of the company’s profit at regular intervals. The ratio between price to dividends has a great influence on stock value for companies that pay dividends. Unfortunately, dividend payments are fairly rare these days. Most companies rely on reinvesting stock gains into the company and relying on the speculative part of the equation for growth.

The part that you are missing is that companies themselves and their employees almost always own a significant percentage of their own shares. That ties their performance back to the overall market. They don’t have to issue new shares to realize a profit on their financial sheets although they can do that too if they need to. A stock price increase will pay them and their employees the same as it does anyone else.

It is a strange game and it depends solely on the fact that people are willing to play along consistently but it does work. However, there is nothing to stop the Red Bouncy Ball Corp of America with sales of $100,000 a year to being valued more than Exxon and Wal-Mart combined if that is the stock people wanted to speculate on. That type of speculation is how market bubbles form. They are built on anticipation of the trend continuing rather than any kind of underlying business growth.

Voting rights. When you own a piece of the company, you have the say in its running in proportion to the piece that you got.

That is true to an extent but it is still really limited unless you are an extremely large shareholder. There was an 80’s sitcom episode based on this (Perfect Strangers?). They went to see the executives of the corporation because they were ‘stockholders’ and weren’t treated that well once they found out it was a single share. The overwhelming majority of shareholders don’t vote at all or even know that much about the company in question.

A higher stock price gives a company a better credit rating, so it can pay lower interest rates on borrowed money.

The appreciation in stock price is not reflected as a revaluation/unearned income in the equities portion of the balance sheet. Only investments made by the company may show a mark-to-market -based adjustment in valuation on the equities side, balanced by a revaluation of the asset itself.

No, it doesn’t. An increase in the share price does not add cash to the asset side (where would that cash come from?), and it does not increase shareholders’ equity on the equity/liabilities side. Of course it increases the value of shares in the shareholders’ securities accounts, but that does not affect the nominal capital on the balance sheet. In fact, it’s quite common for analysts to compare the share price in the stock market to the book value per share and draw conclusions as to whether the share is over- or undervalued.

Things would be different, of course, if the company held part of its own stock, which is possible. In that case, the increase in share price would increase the value of total assets (but not cash, since shares are not cash) and correspondingly increase shareholders’ equity. But that is nothing special - it occurs any time an asset held by the company, be it own stock or anything else, increases in value.

The most direct benefit from the increase in share price for the company (as opposed tio the shareholders), in my view, is that it makes unfriendly takeovers more difficult (since the buyer would have to pay more), and that the company can potentially use its own shares as payment in takeovers of other firms.

Yes, that makes much more sense; I realized after I wrote the response that what I wrote did not make too much sense in regards to the specifics of the question. I tried to put appropriate emphasis on my lack of expertise on the subject.

thanks for the comments so far!
So when I buy Apple shares, it doesn’t help Apple. Understood.
Given that changes in the stock price doesn’t impact the company (within reason), why should a company do anything to influence (ie raise) it’s stock price? Besides the personal benefit to any large stockholders on the board.
BTW, how much stock does the typical board member of a major corporation own?

Share ownership of insiders, for example board members, is a matter of public record and available from SEC filings. You mentioned Apple. The major direct holders are:

Name Shares owned
LEVINSON ARTHUR D 162,136
COOK TIMOTHY D 87,316
MANSFIELD ROBERT L 49,543
GORE ALBERT JR 61,961
FEDERIGHI CRAIG 37,789

62% of the stock is held by institutional and mutual fund owners, not by private parties. That’s actually pretty typical, I own some with institutional ownership as high as 95%, some down at 50%.

Actually, you kind of answered this in your first post, but sort of handwaved it away, when you referred to issuing more stock. This is not such a rare event, and can be quite crucial for a company seeking additional capital to grow its business faster or to pay off existing debt coming due.

Also, stock can be used as currency for buying other companies. To give a simplified example, if company A with 80 million shares outstanding and a stock price of 100 wants to buy company B at a negotiated buyout value of $2 billion, they could do so by issuing 20 million shares to the stockholders of company B.

At the end of the transaction, the stockholders of company A would own 80% of the combined company and the former stockholders of company B would own 20%.

If company A’s stock price had only been 50 but everything else was the same, they would need to issue 40 million shares to the stockholders of company B.

In this case, the stockholders of company A would own 66.67% of the combined company and the former stockholders of company B would own 33%.

Obviously, the shareholders of company A would be happier in the first case, made possible by the higher stock price.

One reason the executives of a company want the stock price to go up is that they’ll lose their jobs if it doesn’t. The execs report to the board of directors, who report to the shareholders. While it’s true that individual shareholders don’t have much influence, institutional shareholders have a lot of influence. So, for example, if Apple’s stock price falls, Apple’s BOD will hear from the big Wall Street firms and from organizations like Calpers (the California Public Employees’ Retirement System). If the stock price continues to drop the big investors may “fire” the BOD. This puts heat on the BOD, who will pass the heat on to the execs, who will pass the heat on to the employees.

I’m not sure this is true, even though I don’t want to rule it out. The rating agencies are rather secretive about the details of their rating algorithms, but I don’t think the rating is a function of the share price. If shares in a company go up due to increased demand, then this does not affect the cost and revenue situation of the company, so I guess the rating agency would not change its opinion as to the capability of the company to service its debt. At least that would be my interpretation, but I’m happy to be corrected if someone with deeper knowledge can affirm that this is what the agencies do.

It’s not that higher stock prices produce a stronger credit rating, exactly. But companies frequently use their own treasury stock as collateral for loans. The higher the value of that stock, the more they can borrow. If the value of that stock goes down, the lender will call the loan.

Plus, the value of stock is also based on how well the company is doing (think, Apple). A company that has its shit together financially not only has a good stock price but also has the other indicators (debt ratio, growth potential, market share growth, innovation in the pipeline, handle on costs, etc.) that excite lenders and cause rating agencies to give good ratings.

So good stock price does not really create better credit ratings and lower borrowing rates, more so both are indicators of overall good financial management.

Doesn’t seem to happen very often, does it? BOD terms are often staggered, so at best you can only fire a subset of them. There have been cases of a director losing an election (against no one, since director elections look a lot like elections in Cuba) and getting reappointed to the now vacant seat.
We have the example of the HP board which has screwed up over and over and seems nice and secure.

If the price goes down too far the company can become a takeover target. If enough shareholders sell their shares at a premium to the buyer, then the board might get forced out. But this can happen to competent management also.

This is pretty significant in many companies. Board members, as well as executives and managers from the CEO & President all the way down through regional managers and VPs, usually own company stock. Yes, it may only represent a fraction of total shares, but for each director or employee it can represent a substantial asset. Add in the fact that many of these shares are awarded or earned over time, and it’s easy to see why rising stock prices benefit directors, executives and managers, if not “the company” itself. None of this is a real problem in most respects. The biggest complaint is that investors (both institutional and individual) and analysts pay too much attention to short-term (ie, quarterly) results rather than long-term performance. This can create a short-term “hit the numbers” incentive rather than a longer-term “build the business” incentive.

How does this work? I was under the impression that companies cannot own their own stock. If they do a share buy-back I thought the shares get cancelled, increasing earnings per share.

I’m in the UK, maybe it’s different over here?