Who Benefits When Stock Prices Are High!

Who benefits when stock prices are high! A relaxed talk on investing from CLEC Investment and Financial Education Academy. Post date: May 24, 2021.

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Teacher, hello. I would like to ask a question. For shares issued by a listed company, what benefit does a high stock price bring to the company? Once the shares are issued, aren't they all bought and sold by investors in the stock market? For the listed company, what direct impact does the level of the stock price have? For example, after financial stocks are issued, I buy a certain financial stock. It pays me dividends, the company does better and better, and I can benefit from the stock price difference and dividends. But for the company, what benefit do they get when I buy their stock?

James answers:

First, everyone needs to distinguish between the operators and the owners.

When you hold a stock and the stock price rises, that is good for shareholders. When you buy a stock, you are a shareholder. Shareholders are the company. What is good for shareholders is good for the company, because the company belongs to the shareholders!

Asking "what benefit does this bring to the company?" is the same as asking "what benefit does this bring to the company's shareholders?" Shareholders are the company, and the company belongs to all shareholders.

Investors often treat the stock and the company as two separate things. This concept is what creates a speculative mindset. They mistakenly think the stock is just a stock and the company seems to belong to someone else, which creates the speculator's idea that they are trading a piece of paper.

Shareholders, meaning stock holders, own the company. Things that are good for the company and a high stock price are a direct benefit to shareholders, the stock holders, owners, and bosses.

A high stock price does not bring direct benefits to the company's employees or general manager, the operators, only indirect benefits.

Stock is a financing channel for a company and a channel for shareholders to turn investments into cash. The original value of a company's existence is to provide shareholders with a return on capital. The benefits shareholders receive when you buy stock are the benefits of the company, and they are also the purpose of the company's existence.

When an unlisted company needs a large amount of capital to expand operations, it lists. It can print many shares and exchange them for cash from the market to use for business expansion. Of course, it also allows original shareholders to cash out, realize investment results, and shift capital to other uses.

After the listing is complete, if the company does not really need capital, the level of the stock price seems unrelated to the company. In fact, that is not the case.

In the United States, after Tesla listed, building cars required a lot of capital. When car sales were not yet large, the company kept losing money, and eventually its usable funds were almost exhausted. Tesla then issued shares again and sold the newly issued shares in the market to obtain capital. At that time, a high stock price allowed the company to sell higher-priced shares and obtain relatively more capital.

Next, the company's highest authority is the board of directors. The board is composed of shareholders, so the interests of the company's highest authority come from the stock price. Therefore, the board and shareholders' meeting will question the general manager about why the stock price is so low. The general manager and managers need to create value for the company and push the stock price higher to meet the expectations of shareholders and the board.

So many companies must find ways to keep the stock price as high as possible, so they can answer to shareholders, who are also the general manager's bosses.

The stock price is very important to shareholders. The company belongs to shareholders, so the stock price is very important to the company. That is where this comes from.

In the United States, dividends are taxed. Taiwan is the same. But if the stock price is high and you do not sell, you do not have to pay tax. Also, a high stock price represents high assets, and a small amount of stock can be exchanged for a return of capital. So major shareholders like high stock prices and do not like dividends. That is why U.S. technology companies now mostly use share buybacks to raise the stock price and return value to shareholders, instead of paying dividends.

Also, U.S. companies like to give employees stock as part of compensation. When the stock price is high, fewer shares need to be issued, so the rights and interests of most shareholders are not diluted.

So in summary, a high stock price is very important, because the only purpose of the entire company's operations is to return value to shareholders, the bosses. Therefore, a high stock price is quite important to the company. It is also the only original need and the only purpose for the company's existence.

It is like owning a commercial building. You hope the property management company runs your real estate well, so many people come to rent offices in your commercial building. You hope the building becomes more and more valuable, and if needed, you can sell it for more cash. So the price of this commercial building is like the stock price. Of course, the higher the better. The property management company is like the employees, who are required to work well so the building becomes valuable. Of course, the property management company also receives some profit sharing.

So stock prices are like real estate and other assets. The higher the price, the more beneficial it is to the company, because the company is the shareholders.