Why do companies want their share prices to rise?
There are a number of reasons that companies want their share prices to rise. For example, a high stock price brings with it a certain amount of prestige and can discourage takeovers. And as well as being able to generate large amounts of revenue for the company, it can also mean that senior management – or employees in general – might get a bonus at certain points in the year.
One way a company can encourage share price growth, is by paying dividends to its shareholders as a reward for their investment. Dividends not only attract new investors, which will increase demand and drive the share price up, but encourage current shareholders to keep their shares rather than selling them. This is good for the company, because selloffs can cause the price of a share to fall as the market adjusts to the increased supply.
If a company ever wants its share price to fall – perhaps to make their shares more accessible to investors – then it can issue a stock split. Stock splits will reduce the price of a company’s stock by increasing the supply of shares available on the market. For example, if a company issues a two-for-one stock split, the total number of shares will double, which means that the price of each share will halve.
However, stock splits do not mean that the company’s market capitalisation will fall, because the reduction in the price of the stock is proportionate to the amount of new stock that has been issued.