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I know that in the financial atmosphere of today many companies that
are doing quite well are still seeing their stock prices tank.
Exactly what is a stock and why do stock prices affect a company's
well being even if the business itself is doing fine? Is it like a
loan to the company?
I, like many I suppose, never really thought about it before things
got so bad. I work for an health insurance company that is doing very
well. We have the most number of insured of any company in the
country and acquiring more all the time. Yet, stock prices are down
by more than half. I don't own company stock so that isn't my
concern. What worries me is layoffs and other cuts.
I'm just trying to understand what the hell is going on.
Thanks
"Jane" <g...@y...com> wrote in message
news:640f8106-2452-4153-9d02-03f64b7a360a@e12g2000yq
m.googlegroups.com...
>I know that in the financial atmosphere of today many companies that
> are doing quite well are still seeing their stock prices tank.
>
> Exactly what is a stock and why do stock prices affect a company's
> well being even if the business itself is doing fine? Is it like a
> loan to the company?
>
> I, like many I suppose, never really thought about it before things
> got so bad. I work for an health insurance company that is doing very
> well. We have the most number of insured of any company in the
> country and acquiring more all the time. Yet, stock prices are down
> by more than half. I don't own company stock so that isn't my
> concern. What worries me is layoffs and other cuts.
>
> I'm just trying to understand what the hell is going on.
>
> Thanks
A stock is not a loan, it's part ownership in the company. If a company had
ten shares of stock and you owned one you would own 10% of the company. I
reality, companies usually have millions or billions of shares out there.
What is going on? That's a far more difficult question to answer than it
appears. A simple answer would be that 70% of our economic vitality depends
on consumer spending. Consumers aren't spending so the economy is weak. They
aren't spending because they have already lost their jobs or fear losing it.
You can see how this will feed on itself. If everyone stopped shopping at
Target the Target would close and the shareholders would lose their money.
The health care industry is a little different. People get sick and they
need health care. Simple enough. The problem is what will President elect
Obama do to change it? Add to this the problems created by the financial
industry. They aren't lending to businesses or people. If a business can't
fund day to day operations they will go under. People will lose their jobs
and your company will lose clients.
On Nov 24, 9:00 am, Jane <g...@y...com> wrote:
> I know that in the financial atmosphere of today many companies that
> are doing quite well are still seeing their stock prices tank.
>
> Exactly what is a stock and why do stock prices affect a company's
> well being even if the business itself is doing fine? Is it like a
> loan to the company?
>
[snip]
It's good to question and fully understand basics. In a capitalist /
corporate economy, individuals can put their capital (savings) into an
ongoing concern, and share in the fortunes of the company. From the
company's point of view, it can raise capital needed for expansion by
selling a major stake its future income stream. Accounting conventions
call the capital raised Shareholder Equity.
Two examples: a) an IPO (Initial Public Offering) where a company
needs capital to move beyond its business start-up phase, and b)
recent instances where troubled banks have raised capital to improve
their balance sheets with new cash. Selling additional stock dilutes
the already outstanding stock.
A company may also seek to borrow money by issuing bonds. Generally,
lenders are reluctant to lend to a company that has more debt
outstanding than Shareholder Equity. So the company may be forced to
sell more shares.
So (besides the emotional "down") it is not good news when the price
of a company's stock falls AND the company needs more capital. The
lower the share price, the larger number of shares must be sold to
raise the same amount of capital. If the business is going rosily,
then it is only a question of how much the employees' (mostly
executives') options to buy more stock are worth (and the merits of
the latter are often a topic of rather hot debate)..
After the IPO the primary source of capital should be the company's
income.
On Nov 24, 6:00 am, Jane <g...@y...com> wrote:
> I know that in the financial atmosphere of today many companies that
> are doing quite well are still seeing their stock prices tank.
>
> Exactly what is a stock and why do stock prices affect a company's
> well being even if the business itself is doing fine? Is it like a
> loan to the company?
No, it's an ownership of the company. A bond is a loan to the
company.
>
> I, like many I suppose, never really thought about it before things
> got so bad. I work for an health insurance company that is doing very
> well. We have the most number of insured of any company in the
> country and acquiring more all the time.
That in itself, BTW, does not necessarily mean your business is doing
well. Insurance companies are being hit hard just like other
financial companies.
> Yet, stock prices are down
> by more than half. I don't own company stock so that isn't my
> concern. What worries me is layoffs and other cuts.
>
> I'm just trying to understand what the hell is going on.
>
> Thanks
On Nov 24, 8:00 am, Jane <g...@y...com> wrote:
> I know that in the financial atmosphere of today many companies that
> are doing quite well are still seeing their stock prices tank.
The drop in stock prices is primarily due to a liquidity crisis where
many want their assets to be in the form of cash or treasury bonds.
> Exactly what is a stock and why do stock prices affect a company's
> well being even if the business itself is doing fine? Is it like a
> loan to the company?
A stock represents ownership in a corporation and it represents a
greater risk to the investor than bonds (or loans) issued (or
acquired) by the same corporation. If a stock is selling for a high
price, a corporation can raise more capital by issuing new stock
making financial growth possible.
> I, like many I suppose, never really thought about it before things
> got so bad. I work for an health insurance company that is doing very
> well. We have the most number of insured of any company in the
> country and acquiring more all the time. Yet, stock prices are down
> by more than half. I don't own company stock so that isn't my
> concern. What worries me is layoffs and other cuts.
The healthcare corporations vary on the strength of their balance
sheet. Can you tell us which company you work for?
--
Ron
A loan to a company is a bond, not a stock. Companies can issue stock
to people to raise money. Holders to stock claim a stake to the
company's profits. Share prices can change based on changing
expectations about the company's future profitability.
Even if the stock price of a company drops, it doesn't really affect
the company in that the company can still carry on business as usual.
However, stock prices may affect a company's ability to borrow.
I've also wondered why a company cares whether or not its stock price
goes down. Isn't part of it that if shareholders are unhappy they can
vote out upper management? But if companies own the controlling
amount of shares, as is often the case I think (?), then I'm not sure
why they would care at all. You hear the expression "keep the
stockholders happy" a lot. What is the threat in the stockholders
being unhappy?
On Dec 12, 9:35 am, iarwain <i...@h...com> wrote:
> I've also wondered why a company cares whether or not its stock price
> goes down.
It's easier to raise money by issuing new stock if the stock price is
high (i.e. considerably above book value).
> Isn't part of it that if shareholders are unhappy they can
> vote out upper management?
It's difficult with funds owning the majority of shares.
> But if companies own the controlling
> amount of shares, as is often the case I think (?), then I'm not sure
> why they would care at all. You hear the expression "keep the
> stockholders happy" a lot. What is the threat in the stockholders
> being unhappy?
The company becomes vulnerable to a hostile takeover. I own stock in
one company that is being threatened with a hostile takeover where the
offer is over twice the current stock price.
--
Ron
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