How does a company makes profit by its shares?

Question

I would like to ask a detailed question. Let us consider a company releasing shares in the initial public offer (IPO). The people at the stock market buy the shares. The company gets the required money. The company put the collected money into its business. Meanwhile, the stock is traded in the share market. Sometimes the share price goes up sometimes goes down depending upon various market dependent and market independent parameters. My question is in what way the company is affected by the fluctutaion in its share prices? Because, the company neither gains any profit when its share prices are up nor loses when its share prices are down. Because, the company has collected the money already. So, the company, its owners and its business are not affected by the share price of that company. It is the poor investers who buy and sell the stock are affected. Am I right? If I am right, why dont we call this as a pure gambling?

Answer 1

With the increase in the value of shares the company always stand to an advantage ( taking loans from financial inst. etc ).  The value of the shares shows the performance of the company and future expectations.    Correspondingly the shareholders too gain, as their investments grows, which gives them the option to sell their shares for a better price than the IPO price.

Thus the owners of the Company, business, are affected by the share price.

As far is risk is concerned, its everywhere for any investments made.  If people are of the opinion that to invest in stock market is gambiling, then the safest bet for them is savings account of the bank.

rgds

Suresh Menon

Answer 2

hi....

Its not gambling but its speculation. The company raise its capital and expands its business through the money collected. The profit earned by the company is then distributed to the shareholders. So how can you say that the shareholders get effected.

The increase or decrease in prices of shares is due to the demand/supply and the market value or information flowing in the market. If there is news that through some project certain company is heading towards huge profit then naturally the share prices of that company rises.

and my friend this is stock market all about.

Answer 3

Hi there,

Its tough to explain it in conceptual terms. But i'll try to explain it through an example.... If u r able to grasp it all ur doubt wiil be clear....And do rate my answer accordingly if you are convinced by my answer.... :)

Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for Rs10. The villagers seeing that there were many monkeys around, went out to the forest and started catching them. The man bought thousands at Rs10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at Rs20. This renewed the efforts of the villagers and they started catching monkeys again. Soon the supply diminished even further and people started going back to their farms. The offer rate increased to Rs25 and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it! The man now announced that he would buy monkeys at Rs50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him. In the absence of the man, the assistant told the villagers. Look at all these monkeys in the big cage that the man has collected. I will sell them to you at Rs35 and when the man returns from the city, you can sell it to him for Rs50." The villagers squeezed up with all their savings and bought all the monkeys.





Then they never saw the man nor his assistant, only monkeys everywhere!! !

WELCOME TO STOCK MARKET

Answer 4

the company is using your money to do their business. they give the dividend when the company is doing good. if not the company will declare bankruptcy you will be ruined.

Answer 5

Most of the times, companies do not make profits directly from its shares.  Shares are used as  a means to raise the capital from the public.  This capital is invested in the operations of the company which will earn the profits.

Of course, higher the share prices -higher the market cap and hence more money available for the company to expand its operations,

Answer 6

u r correct, it is gambling

Answer 7

you are right, the copany owners have nothing to do with the market prices of their company s share. But regarding last part of your question, some call it investment and some call it gambling. you can stick with YOUR choice and dont call others gamblers.

Answer 8

The company does not make a profit or loss on the shares as far as my knowledge goes.... It just needs the capital which the public provides it with, which in turn makes them the owner of the company!! They get to be a part of profit or the loss the company makes. Its not really gambling, you could rather call it a speculation. If someone thinks the company is going to make a great profit and wants to buy the stake (stock) from a willing seller at a higher stake, is that gambling? Its just like buying a property, isnt it?

Answer 9

Good question.

When you buy a share of a company, you are a part OWNER of the company. I can sense that you view the company as an independent entity from you, which it is. However, you as an owner have influence over who runs the company. The management in place run the company with one singular goal, and that is to maximize the value of the investment you made in the company (or in other words, increase the share price). This may or many not happen depending on a multitude of circumstances.

You as an owner (shareholder) have the right to go to the Annual General Meeting of the company and voice your opinion through voting on various measures, including the hiring of management who you think will be best suited to bring best returns to your investment.

Alas, most investors hold small amounts (relatively) of any given companies stock and are not motivated to exert their resources (time, etc) in monitoring and influencing these decisions. However, most companies have a few shareholders who hold such a large amount of shares that it is in their best interests to monitor and regulate company activity, and they do. You will usually find them associated with the Board of Directors of the company.

So, I think you should try and envision the purchase of shares as purchase of ownership of a company rather than putting coins in a slot machine. Because ony then will you look around to find companies that have good track records, and strong management teams in place, which might motivate you to make better decisions about investing your hard earned money.