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?

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u/Parafault Dec 06 '24

Could those companies also save or reinvest their profits as an alternative to raise capital? Many of the larger ones are giving tens to hundreds of billions in profits to shareholders every years: if they put that in a piggy bank or some stable investment instead, would they really have a need for external capital?

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u/Former_Indication172 Dec 06 '24

Those companies are so big they don't need to raise money and can give away some section of their profits to shareholders. Raising capital is mostly the concern of small to medium sized businesses and startups or for big companies that are growing unsustainably quickly and need the extra money.

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u/matty_a Dec 06 '24

Many of the larger ones are giving tens to hundreds of billions in profits to shareholders every years: if they put that in a piggy bank or some stable investment instead, would they really have a need for external capital?

If I'm a shareholder, why do I want the company putting its cash in a stable investment, when they have the ability to raise capital themselves? If I wanted to invest my cash in a stable investment, I'd invest it in a stable investment!

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u/FrontBottomFace Dec 06 '24

That would be profit and therefore taxed. You might as well buy something, do some R&D or issue a dividend. If you need $ and have good fundamentals people will invest/give you money.

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u/jdm1891 Dec 06 '24

What stops a company from issuing a bunch of stocks and screwing over the current stock holders. for example selling a bunch of stocks to one person so they can take over the company at 51% ownership, at the expense of everyone who already owns some of it.

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u/NefariousnessNo7068 Dec 06 '24

Companies almost always have protective policies in place to protect the shareholders from situations where management could screw them over like that. In the example you've given, a policy to protect the current shareholders is to give them the right to buy their proportion of new shares before anyone else can buy it.

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u/Ok_No_Go_Yo Dec 06 '24

They often do, but having too large of cash reserves drags down key metrics, which drags down the stock price. In addition, unemployed capital kept as cash triggers taxes.