# How do companies benefit from a higher SP?



## Tyler Durden (21 September 2011)

This is going to seem like a really stupid question...but how do companies benefit from a higher SP?

Let's just say a company floats and sells 100 shares at $1 each. People buy these shares, so the company gets $100 in return. Tommy has bought 5 of these shares. When trading commences, someone buys these 5 shares off him for $2 each, so Tommy has made a profit of $5. That profit has gone to Tommy, not the company. 

So how has the company benefited from a higher SP?


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## waimate01 (21 September 2011)

Tyler Durden said:


> So how has the company benefited from a higher SP?




The only benefit I can see is that it enables the company, if it chooses, to issue more shares into the market and raise more money to use to expand its business. At a higher share price, it needs to issue fewer additional shares. Yet even here, the beneficiaries are the shareholders, not so much the company. I say that because issuing fewer shares to raise the same additional capital has a reduced dilutative effect on existing shareholders, but it really doesn't matter to the company whether you get diluted or not. So perhaps best to say it makes it *easier* to raise additional capital.

Another benefit lies in branding. Everyone knows the JBH share price has done pretty well, so when you walk past a JBH shop, you probably think "oh, there's another JBH, haven't they done well, maybe I should go in and have a look", instead of thinking "wow, what's that place that looks like a cross between a used car yard and a municipal tip?"

Finally, the relationship between company welfare and share price is, of course, an inverse one. The share price does not really benefit the company, but a high share price reflects the fact the company has had the benefit of good fortune.


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## basilio (21 September 2011)

Tyler Durden said:


> This is going to seem like a really stupid question...but how do companies benefit from a higher SP?
> 
> Let's just say a company floats and sells 100 shares at $1 each. People buy these shares, so the company gets $100 in return. Tommy has bought 5 of these shares. When trading commences, someone buys these 5 shares off him for $2 each, so Tommy has made a profit of $5. That profit has gone to Tommy, not the company.
> 
> So how has the company benefited from a higher SP?




By and large companies make money for the benefit of the  people who initially set them up. (Sounds obvious doesn't it .?)

So consider Mr Lock, Mr Stock and Mr Barrell. They have a cool idea for a new widget. Could be anything but something new and exotic always excites interest and allows the company promoters to suggest their new idea will make absolute squillions of dollars in profit and that investors will therefore also make millions if they can get into the company.

So Lock, Stock and Barrel set up  _Endless Wealth Ltd_. They  offer 50 million shares at 50c each in the IPO. (Initial Public offering ). At the same time because  Endless Wealth represents their intellectual property, hard work and considerable business experience they give themselves 10 million shares each. They don't pay for these. They simply write themselves  certificates. 

They will also be the CEO, Company Secretary and General Manager of the company and will vote themselves  "appropriate renumeration packages" as well as share options. The share options give them the opportunity to buy future shares at fixed prices. For example  They might be able to buy a further 2 million shares apiece at say 60c for up to 3 years after the company is floated. So if the company is successful they will end up paying 60c for shares that may now be worth $2 on the open market.

To convince the public that _Endless Wealth Ltd _ is a great deal they will commission a stockbroker to do an analysis (based on the input of Lock, Stock and Barrel ) that suggest this company will be a real goer. The stock Brokers will circulate this analysis amongst clients like superannuation companies, investment groups and smaller investors and try to get the shares all sold before the stock is listed on the exchange. Naturally the brokers get a commission for their successful selling effort.

When the stock is listed the rest of the public see a new exciting company being born. If the brokers have done their job properly  a number of new investors demand shares and are prepared to pay in excess of the 50c that the initial investors paid.  Let's say it opens at 60c.

So what has happened.

1) Lock Stock and barrel have seen their 30 million shares suddenly valued at $18m. Remember they didn't actually pay a cent for these shares. 

2) The people who bought the shares before listing have also made around 10c a share on paper. So a $1m investment is now worth $1.2 m. In many cases some of these investors will sell their shares quickly to new buyers and take their profit.

So the initial profits are made by the people who gave themselves millions of free shares and see a liquid market for them and the small band of initial investors who  discover they can make a quick dollar selling their shares immediately after listing,

By the way Company Directors are usually unable to sell the shares have given themselves for at least a year (sometimes more) after listing. 

It's worth realizing that most public companies are floated with only a hundred shareholders ( if that ) and the principals and friends of the company will generally have 40% or more of the shareholding in one form or another. 

Cheers


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## McLovin (21 September 2011)

basilio said:


> 1) Lock Stock and barrel have seen their 30 million shares suddenly valued at $18m. Remember they didn't actually pay a cent for these shares.
> 
> ...
> 
> So the initial profits are made by the people who gave themselves millions of free shares and see a liquid market for them and the small band of initial investors who  discover they can make a quick dollar selling their shares immediately after listing,




How have they given themselves "free" shares? They owned the company wholly before it listed, they have now sold 40% of their shareholding.


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## Tysonboss1 (21 September 2011)

Tyler Durden said:


> This is going to seem like a really stupid question...but how do companies benefit from a higher SP?
> 
> Let's just say a company floats and sells 100 shares at $1 each. People buy these shares, so the company gets $100 in return. Tommy has bought 5 of these shares. When trading commences, someone buys these 5 shares off him for $2 each, so Tommy has made a profit of $5. That profit has gone to Tommy, not the company.
> 
> So how has the company benefited from a higher SP?




the company doesn't really benefit the owners do,

In your example the original owners sold out of the company for $100, But now Tommy effectively sold the company for $200.

If the company wanted to expand it's operations and decided to issue more shares to raise capital, it would obviously be better for existing share holders if the share price was high, because they could issue another 100 shares at $2 each and get $200 in their bank account rather than only $100 if the price was $1.


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## cutz (21 September 2011)

The "Wealth Effect" flows back into the economy, bit like a positive feedback loop.
Same thing occurs with property markets.


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## skc (21 September 2011)

Tysonboss1 said:


> the company doesn't really benefit the owners do,




You seem to have a separate mental construt between 'The Company' and 'The owner'... 

Can you define them?


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## Tysonboss1 (21 September 2011)

skc said:


> You seem to have a separate mental construt between 'The Company' and 'The owner'...
> 
> Can you define them?




Company = the actual company itself, BHP, WOW etc

The Owner = the share holder

Do you have a different mental construct.


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## skc (21 September 2011)

Tysonboss1 said:


> Company = the actual company itself, BHP, WOW etc
> 
> The Owner = the share holder
> 
> Do you have a different mental construct.




When you say something benefits the company, doesn't it really benefit the shareholder? The 'Company' itself doesn't feel the impact of any event - it's the shareholders that do. 

The only caveat is that in a listed company structure, the management can allocate those benefits between the present, the future or their own bonuses.


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## Tysonboss1 (21 September 2011)

skc said:


> When you say something benefits the company, doesn't it really benefit the shareholder? The 'Company' itself doesn't feel the impact of any event - it's the shareholders that do.






Tysonboss1 said:


> the company doesn't really benefit the owners do,
> 
> .




Isn't that what I was saying?


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## skc (21 September 2011)

Tysonboss1 said:


> Isn't that what I was saying?




You know what... that is what you are saying. I mis-quotedyou when I meant to quote this...



waimate01 said:


> Yet even here, the beneficiaries are the shareholders, not so much the company.


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## waimate01 (21 September 2011)

skc said:


> You know what... that is what you are saying. I mis-quotedyou when I meant to quote this...




You are a fortunate entity indeed if you have never been a shareholder in a business which is doing "really well", in that revenue is up, profit is up (sorta), workers are happy, bonuses are being paid, new office accommodation has been secured, everyone has a new ergonomic chair and new computer, external consultants are being hired to do employees jobs for them so employees have more time to think about what they'll ask those external consultants to do, customers are happy, every employee gets share options and another week's holiday, nobody has to fly economy and everyone in related industries unanimously agree how well that company is doing .... yet there doesn't seem to be quite enough money left over to pay dividends and your share price is either down or unmarketable.

Okay - technically the 'company' isn't doing well, but ask anybody who doesn't have the misfortune to be an 'owner' and they'll tell you the company is doing great!


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## skc (21 September 2011)

waimate01 said:


> You are a fortunate entity indeed if you have never been a shareholder in a business which is doing "really well", in that revenue is up, profit is up (sorta), workers are happy, bonuses are being paid, new office accommodation has been secured, everyone has a new ergonomic chair and new computer, external consultants are being hired to do employees jobs for them so employees have more time to think about what they'll ask those external consultants to do, customers are happy, every employee gets share options and another week's holiday, nobody has to fly economy and everyone in related industries unanimously agree how well that company is doing .... yet there doesn't seem to be quite enough money left over to pay dividends and your share price is either down or unmarketable.
> 
> Okay - technically the 'company' isn't doing well, but ask anybody who doesn't have the misfortune to be an 'owner' and they'll tell you the company is doing great!




Lol and so very true. I remember reading something like the rubbish bins they had for each OneTel employee cost $100... back in 2001 no less.


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