why does trading price effect the company

[mikeg]

once a company issues and sells a share, and it has no other shares to sell,
why or how would inter-investor trading of that share effect the original issuing company?

eg//
1) company issues 1000000 shares, sells them at $1 each, and gets it's company going.
2) various people now trade those shares, some gains some losses
3) why does company-a care what the value of those shares are? if the company is doing well, paying its bills, and saving some money, why would it matter it the market decided the shares were only worth 10 cents?

[Stocktrading101]

Good question. The answer to is what is known as market capitalization which we have broken down here on the StockTradingToGo site previously,

http://www.stocktradingtogo.com/2007...apitalization/

"Market capitalization, or market cap, is simply the measurement of a company’s total value or worth. If a company wants to buy out another company, they are going to be paying the market cap for it."

So if company XYZ issues 10,000 shares at $100 a piece, the company has a worth of $1,000,000. This is the price another company would pay to buy the company at today's value. The reason a stock will never trade for pennies when it is worth $1 is because the market deems the market value to be at that level.

And even though the company already received the original $1 million, if the market cap is only $1,000 then someone could in theory come in and buy up the whole company for $1,000 and take it over completely. As soon as any one person acquires 50.1% they are the majority owner.

Hope this helps a bit!

[avaritia]

Well, it is in theory... If I had the money, I'm not sure if I would buy a company like Enron for .01 a share to own it. Would I not be on the hook for its debts?

If I remember correctly, in the book called "Corporation", executives were legally bound to make as much money for the shareholders as possible... Sounds far fetched, but perhaps that is why I can't remember if it was true.

[Matt Moss]

mikeg: The stock price of a company plays a huge role in its ongoing operations. A low stock price makes future equity financing less desirable, and can make a company more reliant on debt financing -- pushing up the rates a company pays on debt in the process. Many companies have contractual covenants in their loan and other agreements that require certain levels of capitalization, a breach of which spells bad news for a company. Lenders, even short-term, highly-collateralized ones like repo lenders, can and do get spooked by falling share prices. This can create a self-fulfilling prophecy where a falling stock price of a strong company makes the company weak a priori.

Low stock prices also expose companies to hostile takeovers, which can distract management and possibly hurt shareholders.

There are many other reasons why the secondary market for the stock price has large ramifications on the current value of the company.

Also, as avaritia stated, management does not own the company; shareholders do. The shareholders hire the management for the sole purpose of increasing their wealth. Management has a "fiduciary duty" to the shareholders and must act in their best interests. They care about the secondary market’s stock price because their bosses, shareholders, care.

[WallStRaider]

Matt gave a pretty good idea of why companies abhor low stock prices.
A low stock price does not seem to reflect negatively on the business per se, after all, it does not impact business operations. However, it can affect the perceptions of other companies that it deals with. Many dotcoms gained lots of business as their stock was soaring and when their stock fell 95%, companies they used to do business with thought they were ruined.
Matt, investors theoretically expect a certain amount of return from equity right? But I don't think many companies issue stock for financing, especially large ones, so that's more or less a moot issue..(Except 2008, that was an exception)