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Why Stock Prices Matter
16-02-2012 | By stock prices on 16-02-2012 | Category : Stock News
                 Why do stock prices matter? Companies receive money from the public only when they offer securities for sale in the primary market in what is known as an Initial Public Offering (IPO). After the IPO, in the subsequent trading of shares on the secondary market, any appreciation or depreciation of the stock is born by the investors who buy and sell the shares. As prices fluctuate up or down, the price swings are translated into gains or losses for the investors as they shift ownership of stock. The individual traders receive any capital gains or losses after transaction costs as a result of this trading (Investopedia Staff, August 28, 2011). The original company that issues the stock does not participate in any profits or losses resulting from the sale of its stock shares, because it has no vested monetary interest resulting from the trading of these shares. This does not mean that companies have no interest in seeing that their share prices remain stable (Investopedia Staff, August 28, 2011). There are several reasons why stock prices are important to companies. First, a stable and healthy stock price is an indicator of the overall financial health of a company. This affects the company’s ability to issue bonds or obtain financing from creditors, since banks consider a company’s share price when deciding whether to extend credit and at what interest rate. A depressed share price will almost certainly increase a company’s cost of borrowing. Additionally, the price of existing stock largely determines how successful any secondary stock offerings will be. If a secondary stock sale is issued at a lower share-price, it will bring in less money to the company. Further, in many cases, owners and managers of companies have shares of their own company’s stock in their portfolios, so their interests are in line with their investors. Additionally, investors have clout in that they can force management changes in a company that is underperforming, in hopes of bringing back profitability and upward share-prices. Yet another reason to worry about stock prices is that if share-prices fall too low, a company could be vulnerable to a takeover bid (Gruttadaro, Daniel, 2012; Palmer, Brian, August 9, 2011). Falling share-prices can also affect customer relations. Customers may view falling share-prices as an indicator of financial instability, and jump to competitors if they think a company won’t be able to fulfill contracts or stand behind product warranties. Falling share-prices can also affect employee retention in that employees who receive stock-options as a part of their compensation may not want to stick around, knowing that a portion of their compensatory package will not be worth very much (Palmer, Brian, August 9, 2011). The bottom line is that stock prices of a company do matter. If corporate managers ignore the performance of their company’s stock, there are many consequences which may negatively affect the company in the long run. The company’s reputation will be tarnished with investors; management could be threatened with replacement; the raising of capital could become difficult and more costly; and ultimately, a company could be positioned for a takeover.
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