Expert: Dr. Joseph de Beauchamp - 12/18/2005

Question
Hello There,
I first became interested in investing in stocks and shares in the 1980’s, BT British Gas etc. but there has always been something that has puzzled me about the process, and I am hoping that you may be able to answer my query. It is quite a simple question and I’m sure that there is a simple explanation so I hope that you don’t think I’m being stupid.

When a company, ABC Ltd decides to float on the stock exchange, I can see that the money raised by the IPO goes to the company and they benefit from that money invested and are able to expand etc.
Suppose after a year or so, the value of the shares has increased by say 50% (well we can live in hope!) and I decide to sell my holding, I go to my broker who sells them on my behalf to somebody who wants to buy them. I receive my original investment back plus any increase in the share value.

This is the part that puzzles me, in that year the company has done well and the value of their shares has risen, but it is me who gains from that increase and not the company, so what incentive is there for the company to increase the share price? The way I see it they only benefit from the IPO, unless they issue more shares to raise further funds.

Have I got this completely wrong or am I missing an important point?
I look forward to hearing from you at your leisure.
Regards
Mike

PS. Do you think that the Nikkei is going  to continue to rise over the next 6 months?


Answer
Nikkei is probably going to be flat the next 6 months.

You are correct. The company does not benefit with increase in the stock. It only receives the money at the time of IPO. A secondary offering might help if the stock is up and going to allow them to raise more cash. The company would have to raise money with a new offering of stock and bonds to improve the cash sitaution, which does not change with increased stock price.


Dr. de Beauchamp