Why Companies Care About Share Price

why companies care about share price

Why do companies care about having a high share price?

Why Do Companies Care About Share Price?” Well let me tell you…

There are a number of reasons that share price is something companies care about. While the main focus of corporate executives and insiders should be operations and executing on strategic plans, the share price is a highly correlated secondary that also gets a lot of attention from companies.

Read this short blog post so you can learn why companies care so much about their stock price…

Share Price Denotes Market Capitalization

Companies care about their share price because at the end of the day the share price indicates the market capitalization of the company, (which is what their company is actually worth). Since share price is based on earnings, growth expectations and assets, share price is indicative of how the insiders and executives at the company are performing.  Additionally, people at the company usually have shares in the company, so the same way you are curious about the balance of your brokerage account, they want to know what the share price of their company is.

But that’s not the whole story…

In public markets, sometimes the stock of a company can be used as a currency. For example if a company wants to acquire a smaller company, they can issue shares as part of the takeover or buy-out to diminish the cash outlay required. Companies may want to do this if the price of their stock is perceived as overvalued. On the other hand, if companies think their share price is trading at a discount to the intrinsic value of the business they will want to make acquisitions in cash to avoid diluting their share pool. Make sense?

The thing to remember is that a high share price and strong stock performance often gives corporate executives more leverage and keeps options open for growth-focused companies. But you should know, there are some corporate suits who care more about company share price than the average employee…

Why Executives Care About Company Share Price

Companies care a lot about share price. And the people who hold high ranking jobs at those companies care a lot. And that’s often because they have a vested interest in the share price of the company. While this sounds great in theory, you need to be careful. That’s because a lot of the executive compensation is in the form of stock options. Usually these options are fairly short-term in their expiration. Think about this…

That means the earning power of the executives is tied directly to the earnings power of the company. When the share price of the company appreciates, the executive options become worth more. This can lead executives to manipulate earnings in a short time span of 2-5 years so that corporate earnings exceed expectations and the stock price goes up (making their options worth more). While this temporary pump of the share price might be good if you’re a trader, it’s often detrimental to long term buy-and-hold investors who would rather see earnings reinvested, rather than slashed R&D budgets).

Why do companies care about share price

Do Facebook executives care about their share price?

While it is important that management has incentive aligned with shareholders, these interests should be in the long term. For example:

Warren Buffett is the largest common stock shareholder in Berkshire Hathaway so he has a very long-term focus on building shareholder value – and I don’t think his companies’ meteoric rise in stock price is a coincidence. Regular equity or even much longer term dated contracts or warrants align executives with long term share price appreciation and growth better than short-dated options.

But corporate insiders aren’t the only people who care about the share price of their companies…

Why Institutional Investors Care About Share Price:

Just like you care about the share price of the companies in your brokerage or retirement account, institutional investors care about the share price of what they invest in. And remember, the share price of a company determines it’s market capitalization. So cheap stocks (like penny stocks) are often micro-cap companies with only 100 Million dollars or less of market value assigned to the company. So…

Because institutional investors manage massive sums of cash, they need to find big places to put their money. If you have a couple billion dollars, you just simply have too much to deal with small cap stocks. This lack of real interest by institutional investors can often make stocks under $5 or $10 unappealing to large investors. Without this large institutional support these small companies may have a bit more control over their share price. On the other hand…

Companies that have a high share price (and a corresponding multi-billion dollar market cap) are often influenced much more by activist and institutional investors who have a large stake and want to see a return on investment. In this way, private investment companies and investment banks can have a vested interest in the share price of the companies. They might advocate a stock buy-back if they think the company is undervalued, or a dividend if the company has excess cash and the business is not capital intensive.

So while companies always care about their own share price, it’s often good to be aware of other hedge funds and private investors who may have a stake in the share price of your company. Got it?

So in Summary:

What determines the share prices of a company’s stock is not always fair. A lot of the time the price of a company can be influenced by all kinds of outside news and unexpected events. But at the end of the day companies care about their share price for similar reasons you do. They are invested in their company and they want to profit from it. Does that make sense?

And By The Way: If you’re having trouble coming up with companies who care about their share price, subscribe to the exclusive email updates below for more stock idea analysis…


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