Is maximizing profits the same as maximizing stock prices?
Simply put: Yes, but the full answer is more nuanced. Maximizing a company's profit and maximizing the stock price speaks to the same ultimate goal: seeing a company thrive and make money for its investors. While the goal is the same, the drivers of profits and stock prices are slightly different.
What happens when a stock price falls?
A falling stock price doesn't directly hurt a company, since it also got the money for those shares. Companies with depressed stock prices might be forced to resort to borrowing or holding off expansion.
How do companies accumulate shares to prevent a hostile takeover?
To accumulate shares for the purpose of a takeover, potential bidders are better able to make offers to shareholders when the stock is trading at a lower price. For this reason, companies want their stock price to remain strong to prevent a hostile takeover.
Why would a corporation be concerned with its stock price?
The prevention of a takeover is another reason a corporation might be concerned with its stock price. When a company's stock price falls, the likelihood of a takeover increases, mainly due to the fact that the company's market value is cheaper. Shares in publicly traded companies are typically owned by wide swaths of investors.
Why do firms downsize?
Summary. Firms often downsize because it is seen as a way to reduce costs, adjust structures, and create leaner, more efficient workplaces. But new research indicates that downsizing may actually increase the likelihood of bankruptcy.
What is the importance of downsizing?
Given that downsizings are often part of a larger restructuring plan, managers must ensure that they retain the resources that can decrease the odds of negative outcomes.
Does downsizing save your company?
If You Think Downsizing Might Save Your Company, Think Again. Research shows it increases the chances of bankruptcy. Summary. Firms often downsize because it is seen as a way to reduce costs, adjust structures, and create leaner, more efficient workplaces. But new research indicates that downsizing may actually increase the likelihood of bankruptcy.
Does downsizing cause bankruptcy?
While downsizing may be capable of producing positive outcomes, such as saving money in the short term, it puts firms on a negative path that makes bankruptcy more likely. While not always fatal, downsizing does increase the chances that a firm will declare bankruptcy in the future.
What happens to the company's fortunes when the stock price falls?
If a stock price is falling, they may miss out on bonuses or might suddenly find their jobs on the line.
What are the secondary effects of stock price declines?
Remember, a company's stock can be used as a sort of currency. Companies can sell additional shares of stock, for instance, to buy other companies.
Why do companies sell more shares of stock?
Meanwhile, companies can sell additional shares of stock to raise cash for various purposes, including to expand. When a stock price is falling, the company must sell more shares to raise money.
What happens to the stock market after the initial sale?
But after that initial sale, the shares then trade hands between investors outside the company, including mutual funds, pension plans and individuals. If the stock price falls, these investors lose money, not the company. There are some very serious secondary effects, though, on a company resulting from stock price declines.
Does a falling stock price hurt a company?
A falling stock price doesn't directly hurt a company, since it also got the money for those shares. Companies with depressed stock prices might be forced to resort to borrowing or holding off expansion. CEOs and executives also have a vested interest in seeing shares rising.
What is the goal of maximizing a company's profit?
Maximizing a company's profit and maximizing the stock price speaks to the same ultimate goal: seeing a company thrive and make money for its investors. While the goal is the same, the drivers of profits and stock prices are slightly different .
How does good management affect stock prices?
At its most basic level, maximizing profits and ultimately stock prices depend on increasing revenues and decreasing costs associated with the products or services sold. Good management will produce earnings and industry growth, which will boost firm-specific sales.
What is the short run of a stock?
In the short run, a company's stock price can make small to large price adjustments, depending on news releases and earnings reports. In the long run, a firm's stock price will depend largely on the firm's overall earnings. So earnings, or profits, will be one of the strongest drivers for a company's stock.
What factors drive up stock prices?
Other factors that influence stock price include the perception of management, new product launches, and any developments within the particular industry.
What factors affect the price of a stock?
Investors will also factor in more fundamental factors into a stock's price, such as management characteristics and the economics of the industry. All of these factors influence the earning potential of the firm.
Why did the tech bubble burst?
After all, investors will not invest in a company that is not making, nor will ever make, money. This is one of the reasons the tech- bubble burst: Tech companies were trading at very large multiples —well into the hundreds—but they were not making any money. Investors will also factor in more fundamental factors into a stock's price, ...
Is there a ratio for all stocks?
There is no one ratio that is appropriate to consider for all stocks. That's because the ratio will differ from industry to industry and firm to firm since there are different earnings growth opportunities between individual industries and companies.
Why is a company concerned about its stock price?
The prevention of a takeover is another reason a corporation might be concerned with its stock price. When a company's stock price falls, the likelihood of a takeover increases, mainly due to the fact that the company's market value is cheaper. Shares in publicly traded companies are typically owned by wide swaths of investors.
Why should a company not overissue new shares?
A company should be careful not to over-issue new shares, because an overabundance of shares circulating in the market may diminish demand, where there’s simply not enough buyers to gobble up the shares, which could ultimately depress the stock price.
Why do analysts evaluate stock prices?
Analysts evaluate the trajectory of stock prices in order to gauge a company’s general health. They likewise rely on earning histories, and price-to-earnings (P/E) ratios, which signal whether a company’s share price adequately reflects its earnings. All of this data aids analysts and investors in determining a company’s long-term viability.
Why is compensation important?
Compensation likewise represents a critical rationale for a company's decision-makers to do everything in their power to make sure a corporation's share price thrives. This is because many of those occupying senior management positions derive portions of their overall earnings from stock options .
Why are share prices so high?
Companies with high share prices tend to attract positive attention from the media and from equity analysts. The larger a company's market capitalization, the wider the coverage it receives. This has a chain effect of attracting more investors to the company, which infuses it with the cash it relies on to flourish over the long haul.
Why are stock options important?
For this reason, the existence of stock options is vitally important to stimulating a company's health. Otherwise put, executives stand to personally gain when they make strategic decisions that benefit a company's bottom line, which ultimately helps stockholders grow the value of their portfolios.
Why do creditors favor companies with higher prices?
Such healthy companies are better able to pay off long-term debt, which usually means they’ll attract lower-interest-rate loans, which consequently strengthens their balance sheets.