Whats stock price got to with a company?

[trendie]

Thinking too much again......

If you have a company, and you float it on the company for £1M, you get £1M in return for equity in that company.
Say, for sake of argument, the price per share is £1. (1M shares)
You now have £1M that you didnt have. (in exchange for sharing future profits)

From this point onwards, why should the company be affected by the share price?

I mean, suppose, speculators come in and boost the share price to £5 a share.
The bits of paper "out there" are deemed to be worth £5M. But you, as company director, dont get a share of the increased price, you still only have the £1M when you floated. You just get on with running the business.

Suppose, the share price fell to 20p. You still have the £1M at the float price. You are not affected by the reduction in share price. You just get on with running the business.

Your company makes widgets. The lower or higher share price doesnt affect the rate at which you make widgets, nor does it influence the market demand for widgets.
Nor does if affect the projected value of widget profits.

Once the float has taken place, any share price movements are generally driven by speculation, and to a lesser extent returns in form of dividends.

So, if a bank or company has share price of £10, why should directors or employees care if the share price falls to £1, since business is business. If business is bad,we know its bad. Why should speculators influence board-level decisions, since their motivations are different to the mechanics of either making widgets, or selling stuff in shops?? And the lowering of a share price doesnt alter whether soemthing is saleable or not?

 

[foredog]

Don't buy shares in a company where the directors dumped most of the stock at float!

Thats why most companies have share save schemes, to keep the staff dorectors etc interestd in the co's fortune

 

[Fortune500]

Isn't this like asking: why football players care if their team finishes bottom of the table (or top)? They already have their big contracts. Why does it matter how well the team performs?

 

[trendie]

Isn't this like asking: why football players care if their team finishes bottom of the table (or top)? They already have their big contracts. Why does it matter how well the team performs?

this would affect their future contracts.

but if you sell widgets, and there is only x-amount of demand, you can only sell y-amount of wdgets, and forecast future sales based on realistic future demand.
the stock price doubling does not mean you will sell twice as many widgets. it just means the dividend yield per share would halve.
stock price doubling does not mean your widget-making machines work twice as hard. they can only make z-amount of widgets per day.

if you use Shiny-teeth toothpaste, the doubling of the stock price, or doubling of manufacture does not make you go out and brush your teeth twice as often, or buy twice as much toothpaste.
EDIT: so the change in share price doesnt change the process of the company.
the change in share price doesnt benefit the company itself, only the speculators who are now exchanging the stock between themselves.

 

[arabianights]

One of the biggest recent problems has been the ratings agencies, recognising their incomepetence, have been rating banks by market cap. Therefore short a bank, drive the price down - this means the bank has a lesser rating and as if by magic the bank is actually now worth less

 

[timsk]

Company directors and senior management do care about the share price of their company because the shareholders care about it. If it's dropping like a stone, they - the shareholders - start asking awkward questions. Unless the company's fortunes change for the better, the top brass get booted out which, in turn, filters down through the management levels as new people bring in fresh blood and weed out the dead wood. Right at the bottom of the pile, the real workers don't get their Christmas bonus. So, ultimately, everyone is affected to some degree. To answer the broader question as to what the stock price has to do with the company, the answer is nothing - or precious little anyway. This is well understood by (most) traders who use T.A. and market sentiment to base their decisions on. By contrast, (most) fundamental investors can't get their heads around the concept for love nor money. They remain dismayed, perplexed and bewildered that the price of their stock has waterfalled, even though results were better than expected and all the fundamentals are impeccable.
Tim.

 

[Fortune500]

So you're asking why should they care?

I'm no expert, but doesn't a high stock price means the company can raise new cash, cheaper (by issuing more shares, but now for an increased value). Can also leverage it's position (as above) to perform takeovers of rivals/expand into new markets. It's less liely to be taken over.

 

[trendie]

Company directors and senior management do care about the share price of their company because the shareholders care about it. If it's dropping like a stone, they - the shareholders - start asking awkward questions. Unless the company's fortunes change for the better, the top brass get booted out which, in turn, filters down through the management levels as new people bring in fresh blood and weed out the dead wood. Right at the bottom of the pile, the real workers don't get their Christmas bonus. So, ultimately, everyone is affected to some degree. To answer the broader question as to what the stock price has to do with the company, the answer is nothing - or precious little anyway. This is well understood by (most) traders who use T.A. and market sentiment to base their decisions on. By contrast, (most) fundamental investors can't get their heads around the concept for love nor money. They remain dismayed, perplexed and bewildered that the price of their stock has waterfalled, even though results were better than expected and all the fundamentals are impeccable.
Tim.

why should the share price fall if they keep making z number of widgets per day?
unless the actual sales fall below forecasts?
anything else is caused by speculation by people who have no loyalty other than to their own perceived sense of gain or loss around their own entry price, not by the expectations of the companies sales team and manufacturing ability.

the only value of the company is the value of assets, I think its called Net Asset Value. If you bought shares higher than NAV, you expect dividends to make you money, since you effectively have bought a £20 note for £25, etc. (silly example, I know)
Its only worth doing this if you feel the dividends will recoup that difference, eg, dividend of £6 makes it worth it.

The share price doubling doesnt make the machinery assets or offices worth twice as much as yesterday. nor worth less by dint of shares dropping.

 

[trendie]

So you're asking why should they care?

I'm no expert, but doesn't a high stock price means the company can raise new cash, cheaper (by issuing more shares, but now for an increased value). Can also leverage it's position (as above) to perform takeovers of rivals/expand into new markets. It's less liely to be taken over.

but once you have collected the £1M at the float at £1 a share, if the shares are now perceived to be worth £5M, the shares are worth £5. but this change in value is completely outside the company, as the extra £4M is speculative. the company benefits nothing from this. (this extra £4M exits as an abstraction, as the company cant see this, or use it to buy more widget-making machines)

if you raise new cash, you can get another £1M if you want, but once the initial money has been raised, any change in share price is again not experienced within the company.
If the share price now rises to £10 a share, the company still has only got £1M from the float. The difference is between the speculators.
If the price drops, the company still has its extra £1M.

yet, the share price speculation affects the real-world widget-making.
if the stock price falls, the machinery still makes widgets, and has worth, as do their offices, so why should anyone lose their jobs over mad people sitting at home playing with squiggly lines on a chart, or over-paid analysts in banks (probably with degrees in poxy Media Studies, or Economics, with no understanding of business)

 

[timsk]

why should the share price fall if they keep making z number of widgets per day?
unless the actual sales fall below forecasts?

. . . because the company, its assets, liabilities, products and services has little - if anything - to do with the price of its stock. They are two separate entities that only loosely correlate to one another. The shorter the timeframe, the more tenuous the correlation becomes. The longer the timeframe, the more significant it becomes. In the short term, the price of its shares is governed by market sentiment and is subject to the whims of its sector and the main market index. In the longer term, funnymentals come into play so that if they're strong, the stock price will rise over time and, indeed, may rise very quickly in a bull market.
Tim.

 

[trendie]

. . . because the company, its assets, liabilities, products and services has little - if anything - to do with the price of its stock. They are two separate entities that only loosely correlate to one another. The shorter the timeframe, the more tenuous the correlation becomes. The longer the timeframe, the more significant it becomes. In the short term, the price of its shares is governed by market sentiment and is subject to the whims of its sector and the main market index. In the longer term, funnymentals come into play so that if they're strong, the stock price will rise over time and, indeed, may rise very quickly in a bull market.
Tim.

thanks Tim. that explains it to some extent.

is the worth of a company the Net Asset Value?? (the market value of its assets)

and the anticipated returns (eg, dividends, or projected increase in value) down to things like reasonable P/E ratios?

(dont know why I started this thread, dont even trade shares )

 

[timsk]

thanks Tim. that explains it to some extent.
is the worth of a company the Net Asset Value?? (the market value of its assets)
and the anticipated returns (eg, dividends, or projected increase in value) down to things like reasonable P/E ratios?

You've caught me out! No idea I'm afraid trendie - you'll need to throw this one at subscribers to the 'Economic & Funnymental Analysis' forum me thinks.
Tim.

 

[jumpingjackcider]

I got a link on naked short selling which was a bloomberg special and it really opened my eyes to the market. Basically brokers could short stocks that they did not own or was not in existence and when it cam to delivering those stocks the shorter never delivered. So if you are sometime wondering why a stock would drop so much it might have nothing to do with share value if you look for it on goggle video it was an eye opener i lost the link but it is worth looking at