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Stock prices question...(3 posts)

Stock prices question...UncleMoe
Dec 18, 2001 1:37 PM
This seems like an odd question. I'm a pretty smart guy (I think anyway), but the answer to this question baffles me.

Say you are a company. You go public. (I'm using simple numbers here to keep it simple). You need to raise $1,000,000. So you sell 100,000 shares of stock at $10 a share. This gives you the $1,000,000 you need to do whatever...sell widgets.

As you are selling the widgets, the general public trades your stock. It goes up in value, it goes down in value, etc. My question is...

Why is the stock price important to the company? The company doesn't make any more money from the trading after the intitial sale, right? So why is it important to the company?

I buy the stock at $10, I sell it at $50, I make 5 times my investment. But the company itself doesn't see any of it, so how does it all work?
A few basics...mr_spin
Dec 18, 2001 2:17 PM
The amount of stock sold to public is usually only a fraction of the total number of shares. In an IPO, it might only be 10-20%. The rest is held by the founders and original investors, and often given to employees in the form of options, stock purchase plans, and outright grants. This is a group of people and organizations that is devoted to driving the share price high and keeping it there.

A high share price allows you to make acquisitions of other companies with a better rate of exchange. If I buy your company for $100 million in stock, I want the share price to be as high as possible so I have to give up the least amount of shares. Of course, you want it to be as low as possible. I'm sure anybody who sold their company to Yahoo for stock when it was pushing $400 a share is feeling quite foolish right now.

A high share price shows the confidence the market has in your company. And success breeds success.
Thanks...UncleMoe
Dec 18, 2001 3:43 PM
I thought it had something to do with the outstanding shares that the company held, but I wasn't sure.