What benefits do companies gain after the stock has been initially sold. Do they make money on each trade?
Williemae asks:
After the IPO, I don’t understand if the company has any more benefits of those shares being traded over and over many times. If the company does not have any benefit, why do they concern themselves with the stock price? I would greatly appreciate anyone who can explain this.
After the IPO, I don’t understand if the company has any more benefits of those shares being traded over and over many times. If the company does not have any benefit, why do they concern themselves with the stock price? I would greatly appreciate anyone who can explain this.
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After the shares have initially been sold, further sales transactions are between the buyer and the seller. Companies usually hold some of their own stock, so share price being up improves the value of their holdings. Also, the share price is an indication of the health of he company.
After the IPO, the gain (or loss) on the sale of the stock goes to the owner of the stock, not to the corporation that issued the stock.
So, why is the company concerned with the stock price:
1. Many executives in the company own shares of the stock, and they gain (or lose) value based on the price of the stock.
2. Stock options issued to company management have no value if the stock does not rise.
3. Companies want their shareholders to do well on their investments. If a stock is not doing well, unhappy shareholders can, as a group, force changes in corporate management, and actually be instrumental in removing management (firing them).
4. A growing stock price is good for the company in many ways. Just one example: the company can use its own stock (not issued in the IPO) as “currency’ to acquire other companies. A company with rising stock prices can, therefore, acquire additional businesses without having to use cash.
The proceeds of the IPO go to the previous owners of the company. Suppose I own 100% of my business, and I decide to sell some shares. I have to decide ahead of time what percent of my company will be owned by the new stockholders. The proceeds of the IPO will go to me, which I can use to expand the business or put in my own bank account. The drawback is that I lose control of the company, since there are now additional owners.
In the same way, when a public company sells new shares, the company decides how many shares to issue. Since the overall number of shares is increasing, the control of the previous owners is reduced. The ratio of new shares to old shares tells us how important the new owners will be in running the company.
There are benefits and costs to issuing new shares. One obvious benefit is that the company gets an infusion of new capital, which it can use to lower debt or undertake new projects. On the other hand, the market might decide that the company is too mature — that there are no new, good projects for the company. In this case, the price of the new shares will be lower than the old shares, and this limits the overall value of the company.