How Is A Company Affected when its Share Price Goes Up and Dow

how stock price affects comapnies

Usually, companies’ actions are not really affected when its share price moves. That is, a company does not earn more money or less because its shares go up or down. Therefore, the variation of its price on the stock exchange does not affect the business of the company. For example, if a company sells food or commodities, what matters to them is to sell more food and increase their profits.

Are companies never affected by stock market prices? Although most of the time companies are not influenced by their share price, in some cases it is indeed relevant to the business of a company.

When companies are affected by their share price?

One of the important moments in the share price is when a company wants to make a capital increase. We will explain it with an example to make it easier to understand.

If a company called “Company A” makes a capital increase $100, the Company A is very interested that the price of its shares is above those $100 pesos. If Company A shares are trading at $80, no one will want to buy the new shares of the capital increase at $100. If this happens, the shareholders and investors will not attend the capital increase, therefore, the company would not get the money that it was going to capture with the new offering.

Another of the moments where the stock price matters is when the company itself wants to buyback its shares. Logically, you will try to buy these shares when they are cheaper in order to save money. And if in the future, you sell the shares again, you’ll get to sell ​​them at a higher price and earn money.

Another case is when the shares of a company have a high price, some companies take advantage to buy other companies with an exchange of shares. This exchange could also be made when stocks are cheaper but this would be less favorable to its shareholders as they would have to issue more shares. In addition, the shareholders of the purchased company would have a higher percentage of the resulting company.

We must take into account that normally in the short term, the stock price does not reflect its real value, that is, they may be cheaper than they are worth or be more expensive than they really are worth.

We can pay more for worse stocks or companies with worse results or pay less for better stocks or better performing companies. The ideal is to buy good companies below their value, so that when, hopefully, these stocks rebound and increase in value to reflect the strength of the company, we can benefit from capital gains.

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