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Research :

As far as I can understand :

  • Stock options are used to increase the capital of companies to realize some projects

  • Shares are divided into two categories :

    o Free float (which is the part of shares important for my next question)
    o Locked-in stock

For the free float, it’s easy to understand. Public investors can earn money by playing with stock prices. For the company it’s harder for me to understand. When a company wants capital to run projects, she can do an IPO. The initial price depending on the financial situation.

Question : What are the effects of the increase/decrease of stock prices after that IPO ?

For exemple : Initial stock price was 20 dollars and public investors paid 20 dollars which got into the capital of the companies. If stock price is now 25dollars, company won’t earn 5dollars more. So what’s the point for the company to be devalued after an IPO if she got the amount of capital she wanted ?

Attempt :

I saw only 2 easy solutions :
- If company wants to increase capital a second time, she needs to have a big value on the market to reduce the dilution of control.
- If company is too much devalued, she can be acquired by concurrents.
If company doesnt decrease too much and doesnt want to increase capital again, she has no point regarding the increase/decrease of her stock prices, right ?

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Stock options can be used for raising capital - quite often in some kind of debt swap agreement, but they are also used for a lot of other things as well. (Employee renumeration, tax avoidance f.ex.) It´s not entirely clear to me what the actual question is here, or maybe there is more than one? –  Lumi Nov 25 at 16:04

1 Answer 1

up vote 2 down vote accepted

Exactly. The main issue is if they want to raise capital a second time. The secondary market does not affect the company itself, but it affects its investors. And as investors are important, they need to be treated well. Another problem related to this is that several employees in the company have stock options, so it really affects them.

What companies can do also is buy their own stocks if the price dropped considerably. This is not something that happens right after the IPO because it would make no sense to return the money to the markets right after you received it.

So, to sum up, the direct effects for the company are on the primary market (when the company makes the IPO), the secondary market is between public investors that have little to do with the company.

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Thank you Diego. Another thing coming to my mind is : If i have a high value for my own stocks. I can use it to buy other companies or whatever no ? It can save some cash for the company. –  Adrien Coulon Nov 25 at 14:33
    
@AdrienCoulon Not sure if I understand. A company can always invest in other companies and that will be reflected in the balance sheets. However, it really doesn't matter the value of your own stocks as it doesn't affect the cash you have available to buy other companies. Remember that the public stocks are not yours, so it really does not affect what you can or cannot do with the cash (or other short-term assets) you have. –  Diego Jancic Nov 25 at 15:16
    
@AdrienCoulon - yes. If you look at Cisco (or Google, or many other high valuation companies) they are a case study in the 1990´s in using high stock prices to grow the company through take-overs funded by share capitalisation. –  Lumi Nov 25 at 16:27
    
@AdrienCoulon: In fact, paying with all-stock could be a signal that the stock is overvalued (in fact, there's research suggesting stocks of acquirers that paid cash tend to outperform those that paid stock over the 5-year period following a merger). –  Steve S Nov 26 at 6:50
    
Thank you everybody, my questions was not really understandable, sorry, but i got the answer i wanted. –  Adrien Coulon Nov 26 at 11:32

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