To evaluate a company, especially a joint-stock company, as a clever investor, which features will you care about? Basic parameters are usually indicators of capital, profits, assets, liabilities,…However, with equitization trend happening more and more powerfully as today,share price is becoming a very notable factor as being the core component of most investment portfolios. In reality, share price is also an integral tool and used widely to rate the quality of a corporation more effectively and exactly.
The first major effect of share price to a company is that it is often used as an indication of the overall strength and health of a company. In general, increased profits will drive the stock price up and excessive debts drive it down. Therefore, if a company’s share price has climbed over time, the net worth (equity) will increase as the following result.You can say that to investors, share price is considered as a cost index. That is whywhen the share price is high or increasing, people will think that the company and its management are prestigious and reliable, and they can easily offer new shares to the market to raise capital.Conversely, declining share price makes it harder for companies to secure credit, attract further investors or build partnerships.
Takeovers areone of the most difficult as well as importantproblemsthat all managers need to concernabout. If a company’s stock price falls substantially, then a number of other companies or competitors will try to buy a lot of stock from the open market. Afterthat they will gradually occupy majority control and then may be demand a position on the board or in worst case, demand the right to run the company. At that time, the corporation will be taken-over. As a result, it is the most important to the executives of a listed company to keeptheir share prices relatively stable in order to ensure that there is litter or no likelihood of being taken over.
Despite the fact that the company itself does not truly receive any cash benefits from share price, managers are hardly satisfied with their share price and always want to see it as high as possible. Share price is very helpful in evaluating and predicting the financial situation of companies and preventing acquisition from the hostile competitors. If high and fascinating enough, it also can attract andbring opportunities of getting more money from the investors to expand business.Thus,an essential principlethat all managers should remember is always keep the high price of share.