Company Benefits from The Stock Market, How Do They Work?

Company Benefits from The Stock Market

How does the stock market work? So this is definitely more of an advanced topic, but if you're still new to the markets and you want to get that next layer in, how do companies make money from the stock market? 

Company Benefits from The Stock Market

I already offered up a little reminder, but if you don't even know what the stock market is, I offer other videos for that. So make sure to go through that playlist, the trading 101, but this is like I said, more for, "Okay, I know what the stock market is "and I get the very surface deep of what companies, "why they would do it, but what about that next level? "How exactly is a company benefiting from all this?" 

So this person says, "I see how the investors make money, "or lose, but how is the company affected? "I mean, once all the shares are bought at some initial "price, here the company makes some money, "are those shares just traded from one person to the next "and not affecting the company anymore?" Going forward I want to focus on one word and that word is flexibility.

I'm not the greatest speller, I think I spelled it right though. Flexibility, what do I mean by that? As this person alluded to, like I said if you have a very basic understand of the market, the whole reason a company goes public is to raise capital.

Meaning they are giving away portions of their company, if you did watch my original video they are slicing their company up into slices of pizza and then selling off pieces of pizza. And for each one of those pieces of pizza, they're gonna bring in some amount of money.

But as this person says, "I get that, they're selling off initial "slices of the pizza, initial portions of their company, "they're getting money for that, "but then what happens after that?" the market is just trading back and forth, buyers and sellers and values are gonna go up and down. Again, I have more videos on what exactly is determining those prices, but it's a free market, supply, and demand of those prices. But what's in it for the company? How is the company affected by that? Well, the other keyword is value.

That is how the company is affected in kind of an indirect way because it matters, but then it doesn't matter, the flexibility is a little bit more practical and I'll get to that in a second. But value, obviously if a company's stock price is really, really high then that means their value is going up that much more. The higher a price goes, the more and more value people have associated with that company. Hopefully, that makes sense.

I mean if something, anything in life, if someone were to tell you, "That keeps going up in value," you're thinking, "Oh, people must be feeling very good about that." So that is what the share is out there doing.

The more people want to buy and the higher prices go, then people say, "Well that company's getting more and more valuable." There's more value associated with it. But why does this matter?

 Why does a higher value, meaning higher share prices, so if ABC goes from, let's just say $20 and now all of a sudden it rises in value and now those shares are sitting at $45, what does that allow them to do? They can get, they're gaining flexibility in terms of, you know what? I see company XYZ down here. They kind of maybe a future competitor or maybe I just, there could be a great synergy with it. But for whatever reason, they have an eye on XYZ.

 And the way the stock market works is you have companies that go out and they buy other companies. So if ABC wants to go and buy XYZ, a lot of times they will use their own stock to buy a company. Usually, it's a combination of both cash and stock, but they're using their stock.

And their stock, in a sense, is its own form of money, and the higher the value of the stock. So let me ask this, we'll see it through. XYZ, if ABC wants to buy the XYZ does it become harder or easier to buy it as the value of their own stock goes up?

 ABC's stock. So ABC's stock is going up and up, does that make it easier or harder to buy this? I hope you're saying that makes it easier to buy it because as their stock price goes up, ABC is becoming more valuable.

So if they want to go and buy this, it's much easier to buy XYZ with, let's just call it $45 bills in your pocket rather than $20 bills in your pocket. Whereas let's say XYZ goes even higher, and now all of a sudden they're sitting at $75 for a share and they want to buy XYZ with some shares.

Now it becomes that much easier because instead of $45 or $20 bills they have the $75 bill that they can just start handing out to acquire this company. So that is one way where the outside, where the company's not necessarily making any more money 'cause they've already sold their shares, if their value is going up then they can always issue new shares, they can use shares that they still have.

'Cause, remember, companies that give away 100% of itself, themselves still have shares allotted and that is where it can come to buy a company. So that is just one bit of flexibility. And other flexibility points, they can go out there and if they ever need to potentially raise more money, they can get more money with that.

 There are different avenues that go with it, but the easiest example to kind of reality show is just in the whole acquisition of things. If a company wants to go out there, acquire another company, purchase another company then that makes it a whole lot easier. A very famous one is when Google went and bought YouTube. Believe it or not, YouTube used to be their own separate thing. And I don't know the details on it, maybe if you want to look it up and let me know in the comments section, but when Google went to buy YouTube the founders of YouTube, I think they got some cash, maybe it was all cash.

This could be a bad example. But in some situations, Google could've said to YouTube, "We're gonna give you X amount of shares." And then YouTube's thinking, "Alright, that sounds good to me because your company "is valuable. "In fact, your company keeps getting more and more "valuable so if you give me shares, "then I think I'll make even more money as your shares "continue to go up." So there is a way where, within the market, shares can act as a currency in and of itself where there's actually no physical cash that exchanges hands.

But that's why it really does matter, that's why companies care about their stock price. Even after they've sold stuff, that is where they're very focused on returning value to things because they understand the higher they can get their share price, the more and more valuable their company becomes.

And at the end of the day, it's in the economy, but then you go start to get involved, "Hey, I want my company to be the most valuable. "Hey, I want my company to get the most valuable." And then people are competing on value, which again is dictated by the share price.

So, there's a lot of stuff that goes on afterward and maybe the company's not, "Well we didn't raise any money 'cause now just Bob "and Harry are trading shares back and forth, "and Sally." But at the end of the day, they're keeping an eye on the value of their stock because that's gonna dictate just how flexible they can be in developing other areas of their business.

Related Posts

Post a Comment