Share price, or stock price, is the amount investors are willing to pay for one dollar of company earnings. The price is reflective of the value attributed to the company. An increase in the stock price has several benefits for both the company and the shareholder.
When companies go public, shares are offered to stock investors in exchange for cash. As the stock price goes up, the company receives more cash in exchange for the one share it has to offer. In effect, this gives the company more money with which to invest in itself.
Attracts More Investors
Increasing share prices indicate that investors are expecting higher earnings growth from the company in the future. As the company invests in itself, its potential value for greater earnings increases. Investors will be attracted to this potential. However, the limited supply of shares means that investors will have to bid higher and higher to obtain shares. In addition, the price of the share will only continue to increase or remain high so long as the company makes the earnings expected by investors.
Companies with increasing stock prices have a tendency to attract better quality employees, especially at higher salary levels where stock options are given. The appeal will come from the potential to cash their stock in at a higher price than when they received it. Otherwise, employees will see stock options as a worthless incentive in lieu of actual cash bonuses or salary increases. Employees also see increasing stock prices as a proof of the company's viability, which the employee interprets as proof that he can remain in his job for the foreseeable future.
"Buy low, sell high" is sage advice for investors. When investors buy shares at a low price, increasing stock prices indicate a high rate of return if they sell the stock. If the share price is lower than what an investor pays for the share in the first place, he will lose money when he decides to sell. A higher price guarantees at least some profit to the investor.
- InvestorsFriend.com: What Causes Stock Prices To Increase?
- Venturebeat; Linkedin's Day In The Sun: Share Price Doubles, Worth Nearly $9B In Ipo; Matthew Lynley; May 2011
- Investopedia:Price-Earnings Ratio - P/E Ratio
- Investopedia: Stocks Basics: What Causes Stock Prices To Change?
- Investopedia: Stocks Basics: What Are Stocks?
- Investopedia: How And Why Do Companies Pay Dividends?
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