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Sir, I am new here & I wanna understand the way the shares are bought & sold (maybe it is a silly one but important)
When the company raised finance from ordinary shares by issuing in the stock market that is the end of the company. BUT in the stock exchange, people can buy or sell the existing issued shares (let’s say 1000 shares). Then why would the company be concerned about what the market price of the shares would be because people have already bought the existing shares and there is no way they can ask for the money back if any company’s decision would change the market price?
Secondly, it is a dealer who sets the market price of a share that what price investors are willing to buy or sell the shares for which can be changed by the dealer at any time when he sees any change in demand & supply. BUT I thought that it was the performance of the company that influences the share prices in the market?
For your first question, the company is concerned about the share price for several reasons. One is that if they ever need to raise more finance then it will be harder for them if the share price has been falling. Secondly, if the share price is falling then there is more of a risk of the company being taken over. Another reason is that shareholders vote on the re-appointment of directors at the AGM. If the share price has been falling then shareholders will not be happy 🙂
With regard to your second question, see my reply to an earlier post:
https://opentuition.com/topic/market-value-8/Thanks for the answer. It was indeed helpful. 🙂
I still have a little query that you said that market value is set by the dealer according to whatever investors are prepared to pay.
BUT doesn’t it true that the market value of a share is simply depend on the performance of the company whether it is doing good or not? If so, then how can the dealer control the price in the stock market?
I am stuck here whether the market value of a share price fluctuates according to the company’s performance or it is the price that is set by the dealer in the stock exchange so that investors would be willing to buy & sell.
Firstly, the market value of the share is based on the shareholders expectations of future dividends (i.e. how they expect the company to do in the future, not how it is doing at the moment). I stress this in my lecture.
Secondly, it is the shareholders who decide what the price of a share will be. The dealer adjusts the price in response to the supply and demand. If the share price is currently $3 but people to not want to pay $3 because they think it is only worth $2, then the dealer will reduce the price to $2 to persuade people to buy. Just like any trader on any market – they adjust their prices up and down depending on the supply and demand. The stock market is just that – a market – with traders matching the buyers and sellers together by stating prices from day to day that investors are happy with.
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