The secondary market and the impact it has on companies

[Asgard01]

Hi all,

I just wanted to ask a question about the stocks that we own by being in the secondary market and how frequently I hear people talk about how by doing so they are providing credit for companies, creating jobs and allowing companies to grow etc - fueling the economy as it were. This is often found in responses to questions relating to the ethics, morals or potential presumed selfishness of investing in stocks that is not my concern or personal opinion here at all.

I wondered if anyone can correct my understanding or add any points to this as I thought that in being a secondary market investor in stocks I am providing no money or capital to any company directly as this has already been generated in the IPO and many other people who are critical of the positive impact of investing in stocks might suggest that the companies do not care about who buys shares in this market as they have already made their money and who owns the shares in the future secondary would not matter to them as much or directly impact them.

This doesn't seem completely right to me though and I wondered what would be the positive impact to companies with the presence of the secondary market?

Chris

[seattlecyclone]

In general, people buying and selling shares on the secondary market has no direct effect on the companies behind those shares.

However there are some indirect effects. Many companies issue new shares all the time to compensate their employees. The higher their share price tends to be, the company needs to offer fewer shares to its new employees and its existing employees have more incentive to stick around. If you have enough market clout to meaningfully affect the share price, you can potentially decrease executive pay, as many higher-level executives tend to be paid mostly in stock. On the other side of the coin, a higher share price means that a company is less likely to choose share buybacks as a way to return cash to shareholders.

[forummm]

And even more derivative, the existence of a liquid secondary market allows the IPO prices to be higher. If initial investors knew that the shares from a particular company were not going to sellable, they would either decline to participate or only be willing to pay a much lower price for the shares during the IPO. Liquidity is a very valuable feature of stock investing.

[Retired To Win]

Also, the price of shares on the secondary market establishes a price point -- or more accurately, a price ceiling --  for follow-on stock offerings that the company may want to make to raise additional capital after the IPO.

[firewalker]

Is it common for a company to sell more stock after IPO?

[forummm]

Is it common for a company to sell more stock after IPO?

Yes. Both buying and selling. Sometimes they sell (or issue) shares to employees as compensation. Sometimes they issue shares to another party to buy another company. Sometimes they do share buybacks. Sometimes they need more cash so they sell shares.

[marty998]

You can think of the share price as a judgement on the competence of management.

Many a CEO has been sacked for poor share price performance... though many a CEO has been protected by Boards with their collective heads in the sand.

If you own a share you can vote. If you own lots of shares you can start asking for change (except if you own NewsCorp shares...)

[Asgard01]

You can think of the share price as a judgement on the competence of management.

Many a CEO has been sacked for poor share price performance... though many a CEO has been protected by Boards with their collective heads in the sand.

If you own a share you can vote. If you own lots of shares you can start asking for change (except if you own NewsCorp shares...)

I presume such votes etc do not apply if you own units in mutual fund however?

[dandarc]

You can think of the share price as a judgement on the competence of management.

Many a CEO has been sacked for poor share price performance... though many a CEO has been protected by Boards with their collective heads in the sand.

If you own a share you can vote. If you own lots of shares you can start asking for change (except if you own NewsCorp shares...)

I presume such votes etc do not apply if you own units in mutual fund however?

Funds can and do participate in the votes.  But as far as I know, since the fund owns the shares, the fund votes, and not you as an individual.

[marty998]

Correct, the fund votes on your behalf.

Can be quite a cosy relationship at times between Funds and Boards. The executive "talent" pool overlaps in the big end of town. You'll find some mutual funds will not vote in the best interests of their investors but in the best interests of themselves. Can be hard to prove given the propensity of mutuals to not disclose how they vote.

[seattlecyclone]

Vanguard publishes some of their general rules about voting on the shares they hold. Other fund companies will of course have different policies, or just let the fund managers decide.

[forummm]

Is it common for a company to sell more stock after IPO?

PG&E is doing it now:

PG&E Corporation (NYSE: PCG) announced today the pricing of the previously announced public offering of 6,800,000 shares of its common stock at a price to the public of $51.90 per share. The offering is expected to close on August 10, 2015, subject to customary closing conditions.

http://www.pgecorp.com/news/press_releases/Release_Archive2015/150805press_release.shtml

[EricP]

When a company does a second offering do they have to have retained some equity during their IPO (or bought shares back later) or do they water down shares?  Is this a board/shareholder decision? 

[forummm]

When a company does a second offering do they have to have retained some equity during their IPO (or bought shares back later) or do they water down shares?  Is this a board/shareholder decision? 

It's a board decision. I think a second (or third, etc) offering can dilute existing shareholders. If the company gets a good value for their shares, it doesn't decrease the value of the existing shareholder shares (because now they own that extra cash the company took in too). But even if some extra shares were created but held in reserve, it has the same effect when the company sells those shares.

[seattlecyclone]

Anytime a company makes new shares, whether they're offered to the public or given to employees or anything else, this will dilute existing shareholders. "Holding shares in reserve" and then selling them in the future is not meaningfully different from creating brand new shares before each sale. As forummm points out, a public offering should give the company cash to offset the dilutive effect, and stock-based compensation saves the company cash in a similar manner. It's all up to the board.