Share Price and Company Operations

How does the Share Price affect Company Operations?

A Share Price does not affect the daily operations of the company. What the share price does is to provide a reflection on how much a person will pay to lay claim on a percentage of the earnings, and should the company wind up, a percentage of the assets after the debtors are paid off.

Companies secure funding from the public through Initial Public Offerings, Secondary Offerings as well as Issuance of Rights. These are methods to obtain funding from the general public. In return, they give up a percentage of their ownership of the company.

What does the Share Price tell you?

The share price tells you how much a person would pay to obtain the percentage of earnings by the company. Therefore, if the company performs well or has high growth prospects, I would pay more to obtain a share in that company. As long as the company is improving its year on year performance, the value of the firm increases, as should the share price. A lagging share price due to inefficient markets provides opportunities for value investors.

How we lay claim to the earnings of the company is through its dividends, and/or by divesting our holdings.

Why does the Share Price not reflect the Company's Value?

There are many occasions where the Share Price does not reflect the company's value. This results in the company being overvalued or undervalued. This is due to the inefficient market hypothesis.

For overvalued companies, what will usually happen is that once the hype is over, or if investors feel that there are other undervalued options out there, the company's share price will correct, resulting in a drop.

For undervalued companies, what will happen is that should people discover that the company is underpriced, and in layman's terms, value for money.

"Price is what you pay, Value is what you get". I always keep that in mind and assess if it is possible for the company to increase its value, before deciding if I am overpaying or underpaying.

Non-Dividend Paying Companies - Good or Bad?

There are some companies that do not pay dividends. These companies could be capital intensive companies where they need to retain cash for expansion purposes. These companies could also issue rights more often than others in order to finance its operations. It results in money outflow from the investor without much money inflow.

So why should we still take into account non dividend paying companies? Companies that do not pay dividends are not necessarily bad. As the company turns in better returns, the value of the company will increase, as will the share price once the company is noticed. This would mean capital gains for investors. Furthermore, once companies have matured, they may change their policy such that they provide dividends.

Dividend Investing?

I do not advocate dividend investing as it requires a large capital to obtain substantial returns. Furthermore, REITs (one of the higher yielding stocks) are also affected by the downturn. The performance from Dec 08 to Feb 09 can be found here.