Sometimes the tail can even wag the dog, and investment behavior can actually spur real economic growth or decline. Over time the stock market and larger economy should rise or fall at about the same rate. A stock with a reputation for paying dividends may have more demand, and therefore a higher stock price3. Large public corporations are no exception, and they do this by sometimes taking a portion of their profits and paying it out to shareholders. The other thing that can happen if the stock prices trends too low is the company becomes vulnerable to take-over by a rival. If the stock performs poorly, the shareholders will get the board to replace the company's management team by first replacing board members if necessary. A business exists to make money for it's owners. Once a company sells itself in this way, where ownership in the company has primarily become an investment vehicle, it's no longer good enough for a company to be simply stable and profitable. If a company is not also growing as quickly as it can, it's in trouble.
This kind of thing must be approved by the company's board of directors, who are elected by shareholders and exist to act on behalf of the shareholders rather than the management team or employees. But the important thing to understand relative to this question is the stocks are a one-time sale for the company. So owning the right stocks means sometimes getting "free" money above and beyond the value of the stock itself. The other way a stock has value is through dividends. In other words, if a C-level executive wants to keep that nice six or seven figure salary, they better keep that stock price healthy4. Think about this point some more in relation to footnote 2. More than that, just showing good growth is often not enough. When you buy a stock, you're buying a very small ownership stake in the company1. In practice, dividends also have some negative attributes, such as higher tax rates, that don't attract as many investors as you might think. Large public corporations are no exception, and they do this by sometimes taking a portion of their profits and paying it out to shareholders. To raise the price further, you must exceed your own projections, which were already often optimistic in order to keep investors happy in the first place. If a company is not also growing as quickly as it can, it's in trouble. We don't really care about the ownership stake so much. This makes them a useful place to park savings, that might even provide a good return. As a practical matter, the stock market as a whole cannot indefinitely out-perform the general economy, relative to the portion of said economy devoted to investment practices. Of course, you, I, or any other average Joe are unlikely to ever reach the level where we have a meaningful reason to attend a shareholders meeting and actually vote on anything that matters to us5. This has interesting implications in the face of investment vehicles like mutual funds, where you don't own shares in the fund companies directly. A business exists to make money for it's owners. But the money went to the previous owner of the stock, which is usually not the company itself. Thus a low stock price can be dangerous for a company's very existence. A stock with a reputation for paying dividends may have more demand, and therefore a higher stock price3. We do care that stocks have shown stable and even increasing value over time. But there are variances between the two, where sometimes the stock market can lead or trail what the larger economy is doing, and some individual stocks can out-perform the economy while others languish. This never-easing pressure has a profound impact on how corporations behave. The other thing that can happen if the stock prices trends too low is the company becomes vulnerable to take-over by a rival. The prevalence of small investors can have an interesting impact on corporate ownership structures. Sometimes the tail can even wag the dog, and investment behavior can actually spur real economic growth or decline.
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