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How companies profit when people buy their company shares

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What happens when a company enjoys higher stock prices?

To understand how companies make money from selling their shares, you need to first understand why they sell the stocks in the first place. Typically, a business will sell stocks to raise money. It is an alternative to borrowing money from the banks or taking another small business loan. Selling stocks is an option only when the founder and CEO are ready to relinquish control of the company to a certain degree. It opens up a new avenue for funds, but there is no threat of future cash flow.

When companies want to preserve some amount of control, they go through private placement. It allows the management to choose who can become a stockholder of the company. The legalities of private placement differ between countries. The laws in India are different from that in the US, but the basic objective of the practice is the same. It is the complete opposite of initial public offering or IPO. A company only launches an IPO when it is ready to go public. It is a smart way of raising capital, but it dilutes the control of the owner.

Do increasing stock prices directly contribute to company profits?

People believe that companies profit from increase in share prices and IPOs directly. That is an incorrect notion. Two distinct markets comprise the stock market – primary market and secondary market. When the company issues the first shares or launches IPOs, they do so in the primary market. The shares sell at the specific offering price and the companies receive the first round of cash. When the first round of investors sell their share market investments to secondary investors in the secondary market, the primary investors can enjoy profits in the event of a price rise. Marketing media, websites and blogs follow the daily price fluctuations of the secondary market. Therefore, an increase or decrease of the share prices in the secondary market does not affect the company’s profits directly.

What are the direct implications of stock market prices on the company?

You could say that it is oversimplifying the way the stock market, share prices and company profits work. So, to add a generous share of complication let us also tell you that a company should gun for robust share prices. The presence of strong prices can help the market capitalization of the company. That should allow the company to issue the IPOs and shares at higher offering prices than contemporary companies and competitors. The price of its stocks is one way of judging the health of a company. There might be exceptions, but that is the typical yardstick of a company’s success. One way of seeing it is – profit attracts profit. In the case of the share market and share prices, that is the ultimate truth.

How does a company control stock prices?

The issuance of shares is very similar to production of limited edition shoes, action figurines and cars. Fewer the number more is the value of the commodity among the savvy people. Although shares are not tangible like these items, when the business management issues too many shares at the same time, it may push the market worth of each and dilute the net value of the company. If higher share prices act as creditor magnets, plummeting prices damage the repute of the brand name and make it difficult for them to find prospective creditors.

Impressive stock pricing can ensure better financing

There are a few indirect profits that a company can enjoy from the rising prices of its stocks. An impressive pricing of the company shares is crucial for the enterprise to secure equity financing. IPOs generally fund the initial setup and expansion plans of a company. The future expansion efforts and acquisition endeavours demand more capital than IPOs can raise. Equity financing can potentially raise billions of dollars for large enterprises and sizeable amounts for smaller start-ups in the share market. The secondary issuance of stocks can continue for as long as there is demand for them in the open market.

Higher prices provide security to executive management

The share prices of a company act as the mark of financial health and performance. As the stock prices increase the reputation, reliance and trustworthiness of it also increase. It is the ultimate performance indicator in any market irrespective of the nation and nature of the organization. The shareholders elect the Board of Directors, who reserves the right to remove the executive management in case the company (that is the shares) is not performing well.

High share prices prevent future takeovers

Higher stock prices of course provide the protection against future takeover manoeuvres. All public companies have expansive distribution of the stocks all across the country with hundreds of thousands of owners. Accumulating all company shares for the exclusive purpose of takeover is going to be a Sisyphean task for whoever wants to assume control next. Companies with high stock prices have better insurance against such hostile takeovers since the potential new owner is less likely to pay the steep price to each shareholder. It is common knowledge that all potential bidders across the country wait for share prices to drop so they can buy up the stocks of a particular company.

How does a company profit from better share market performances?

When a brand performs impressively in the market it garners positive press. Stock analysts, share market blogs and expert advice are more likely to include these companies that manage to maintain stable stock prices. That adds a different kind of benefit – the advantage of reputation. When brands start garnering respect from their target users and customers, they are more likely to enjoy better share prices. And as we know well by now, higher stock market pricing promises better security against takeovers, better financing opportunities and improved financial health.

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