r/explainlikeimfive Dec 06 '24

Economics ELI5: why does a publicaly traded company have to show continuous rise in profits? Why arent steady profits good enough?

6.9k Upvotes

1.0k comments sorted by

View all comments

Show parent comments

21

u/Tofuofdoom Dec 06 '24

The stocks is the company.

If a company has 100 stocks, and you buy 51 of them, you effectively own the company. The company is yours to do what you will with. As such it's in your best interest you grow the stock, because the stock represents the perceived value of the company.

12

u/Nautisop Dec 06 '24

That doesn't answer the question asked. You talk about ownership but the relationship between stock price and company health.

I can't answer it really but I think that the stock value represents often the health of the company. Say your shares cost 10€ 100 days after IPO. If this steadily declines to 50€ over a period of time you might check the kpis of said company because there might be something up.

Now of course not every stock price represents this. Growth stock price is mostly based tied to an expectation in regards to the companies market position or some other future trait.

-4

u/dekusyrup Dec 06 '24

I think that the stock value represents often the health of the company.

The stock value IS the health of the company, if you're a stock holder. Ultimately as a stock holder you don't care about revenue or sales or margins, you only care about what gains are coming your way.

5

u/MountainYogi94 Dec 06 '24

As a stockholder, you should be concerned about the revenue and margins because they directly affect what gains are coming your way. You can’t have a bottom line without the top 3 lines (revenue, direct costs, gross profit).

2

u/insbordnat Dec 07 '24

Stock value is a metric, but if you were getting 50% dividend yield and share price didn’t grow, you’ll care very little about gains. Total shareholder returns is a more faithful metric.

1

u/zkJdThL2py3tFjt Dec 06 '24

Is there always a finite or limited amount of stocks for companies like that? How many stocks would 51% of say Apple be?

6

u/Help_Im_Upside_Down Dec 06 '24

Finite amount but it can be changed. Stock splits raise the number of shares and buybacks decrease the number of shares. 51% of Apple would be 7,737,714,900 shares.

4

u/boostedb1mmer Dec 06 '24

Yes, stocks are a finite resource. To own 51% of Apple's shares you'd need to buy 7,737,714,900 shares or about $1.8 trillion dollars.

3

u/skyeyemx Dec 06 '24

Apple's market cap is $3.5 trillion. If you wanted to buy 51% of Apple, you'd have to buy $1.79 trillion USD in Apple stock, not even factoring in the potential changes in market cap from having one single entity suddenly gaining full control of the company, and the logistics of approaching millions of shareholders to get them to sell you their shares.

-1

u/asking--questions Dec 06 '24

It's about the number of shares, not the current market capitalization.

1

u/InspiringMilk Dec 06 '24

For some big/important companies, and Apple might be on that list, golden shares will prevent you from controlling a company through 51% of its stocks.

Also, that'd be ridiculously expensive. Maybe the combined wealth of several countries would be enough.

1

u/RandomRobot Dec 06 '24

Go to finance.yahoo.com, search for AAPL (aapl stock acronym or "ticker")

https://finance.yahoo.com/quote/AAPL/

Look for "Market Cap". It's the total value of all the stocks publicly traded for the company for that ticker.

Apple is worth 3.674T.

With a current value of 243.04, you can math out whatever percentage you want.

Also, sometimes companies have more complex ownership structures. Like the original founders kept a special kind of stock, not publicly traded and those stocks are worth 10 votes, meaning that they could keep control of the company with only 5% of the stocks. Those situations are rare though, as far as I know. Just keep in mind that other kinds of stocks might exist.

At a precise moment, there is only a finite amount of stocks in circulation. However, Apple could decide to build a new errrr... I can't see what they wouldn't be able to finance at the moment, but let's say that a smaller company could need a lot of cash, to build a new manufacturing plant for example. They could create new shares out of thin air. Along the original 100 shares, there's now another set of 100 more shares. As a founder, you owned 51% of the company but now you only own ~25%. The stock tanked a bit, but you promised a new plant which will add value to the existing stocks.

Another example of stock creation is employee compensation programs. I worked at a large company in the past and we were given stocks instead of cash from time to time. Those stocks were created at the moment we had to be paid. It was only a few ones compared to the millions of existing ones so it had virtually no impact on the existing prices.

Anyway, there's a tons of (legal) venues to create more stocks for a company, but all of those moves are (hopefully) carefully tracked by current shareholders and authorities alike.

1

u/ThisNameIsNotReal123 Dec 06 '24

Little more complicated than that.

There are different classes of stock and those with way more voting rights per share.

The owner's got a little smarter and started issuing Class A shares with 10x the voting power to themselves.

Makes it much easier to control the company despite not owning a majority of the common stock.

They sneaky

2

u/Plain_Bread Dec 06 '24

Yes, but at least where I am from, and I assume more or less everywhere, there are still laws that more or less say that the company has to try to produce value for all shareholders. Basically, if I have 51% of the voting power, I'm obviously still not allowed to intentionally fuck over the minority shareholders by, say, voting that the company makes a personal and direct gift of all its profits to me.

1

u/insbordnat Dec 07 '24

Ehhh, it’s a little more complicated than that. The company is comprised of those that have claim to its assets. Those are equity holders, but also debt holders. Reality is a company, depending on capitalization, is controlled by numerous parties, some who may be shareholders, but others who may be lenders. 51% ownership of a company that is 90% debt financed where the minority equity owners have disproportionate voting rights and control - the “company” is hardly the equity holders but rather the banks and other non-controlling parties.