Seeking understanding regarding share values relation to company success - Tilted Forum Project Discussion Community

Jimellow · 08-17-2006, 10:38 AM

I was reading an article in the Wall Street Journal just now, and while this question relates directly to that article, it also involves a larger question that relates to stocks, businesses, and success.

To help clarify my confusion, I am going to quote a paragraph or two from the article:

Quote:

Based on Siemens AG's shareprice performance, Chief Executive Klaus Kleinfeld hasn't had the greatest year and a half at the helm of the engineering and electronics conglomerate.

In Mr. Kleinfeld's first 19 months as CEO, shares of the company, based in Munich, have risen 5%-greatly underperforming peers such as ABB Ltd. of Switzerland and Philips Electronics NV of the Netherlands, as well as Germany's DAC index. The DAC index of leading shares has gained 35% since Mr. Kleinfed took over at Siemens in January 2005. Meanwhile, ABB shares have more than doubled and Philips shares have climbed 39%. Siemens shares rose 2% yesterday to 64.79 ($82.43), up 1.72.

I am having trouble understanding the relation of a company and its shareprice to its investors. Furthermore, what exactly causes shareprices to rise and fall?

Both of those questions seem very basic in nature to me, and while I likely am able to partly answer both of them, there is also a feeling of ignorance regarding how company share price is related to its success, and how that ties into its shareholders.

Is a company's success determined solely on the value of its stock? In the quoted portion above, it seems that there is a direct correlation between success and shareprice, but I don't really understand what that correlation is.

Furthermore, when publications mention shareholders, are they strictly referring to those that have huge investment in the company, thus excluding Joe Average who recently invested $10,000, buying 154 shares, in the hopes of turning a profit so his kid can go to a better college in the fall?

If someone could clarify or explain more specifically how the entire process works, I would greatly appreciate it.

ozahs · 08-31-2006, 08:05 PM

I doubt if I can answer your question completely, but I think I can start chipping away at it. Stock prices go up and down because of supply and demand. If someone who has done their homework and properly evaluated a stock determins that the stock of XYZ company is undervalued, he might choose to gamble on it and purchase it with the expectation that the price will rise. (An invester can also gamble that the share price will fall.) If a lot of investors feel the same way, the price rises becaue lots of people are buying it.

When evaluating a stock, a potential investor looks at a lot of differnt things in order to come up with a perception of it's lrelative value, such as ROI(return on investment), P/E (profit to earnings ratio), expense ratio, dividends, quality of management, market trends, etc.

In your example above, the CEO was not perceived as being successful because the stocks of peers performed markedly better than that of his company. There are lots of things that CEOs can do to raise the stock price. Layoffs are one popular strategy, but so are cost cutting measures that reduce the amount of expenses that cut into profits. Some companies diversify, while others narrow thier focus. But it seems to me that the gist of the article was more about the perceived lack of success for the CEO, as opposed to the company itself.

A Sharholder is someone (or an entity) who owns stock in a company. It can be one share, or millions.

As a shareholder of a company, you expect two things out of the ownership experience. One is that the value of your shares should increase as opposed to decrease (unless you have invested in a type of transaction that will give more returns the lower a stock price goes - this type of investing is normaly the realm of very experienced investors). The other potential expectation is that the company will declare a dividend. When this happens, the company takes profits and divides them up by the number of shares outstanding and gives all share owners a piece of the profit. So if there are 100 shares outstanding, and the company has a profit of $100, a $1 dividend goes to the owner of each share. Utilities are known for giving out good dividends, but the share price is less likely to increase steadily. Retirees like to invest in utilities because it gives them a steady income.

When I look at an investment that I have made, I consider it a success if the value of my investment increases at a reasonable rate. Since I don't need dividend income, all my dividends are re-invested in additional shares of stock.

Hope this makes some sense...

08-31-2006, 08:05 PM	#2 (permalink)
ozahs Tilted Location: Eden Prairie, MN	I doubt if I can answer your question completely, but I think I can start chipping away at it. Stock prices go up and down because of supply and demand. If someone who has done their homework and properly evaluated a stock determins that the stock of XYZ company is undervalued, he might choose to gamble on it and purchase it with the expectation that the price will rise. (An invester can also gamble that the share price will fall.) If a lot of investors feel the same way, the price rises becaue lots of people are buying it. When evaluating a stock, a potential investor looks at a lot of differnt things in order to come up with a perception of it's lrelative value, such as ROI(return on investment), P/E (profit to earnings ratio), expense ratio, dividends, quality of management, market trends, etc. In your example above, the CEO was not perceived as being successful because the stocks of peers performed markedly better than that of his company. There are lots of things that CEOs can do to raise the stock price. Layoffs are one popular strategy, but so are cost cutting measures that reduce the amount of expenses that cut into profits. Some companies diversify, while others narrow thier focus. But it seems to me that the gist of the article was more about the perceived lack of success for the CEO, as opposed to the company itself. A Sharholder is someone (or an entity) who owns stock in a company. It can be one share, or millions. As a shareholder of a company, you expect two things out of the ownership experience. One is that the value of your shares should increase as opposed to decrease (unless you have invested in a type of transaction that will give more returns the lower a stock price goes - this type of investing is normaly the realm of very experienced investors). The other potential expectation is that the company will declare a dividend. When this happens, the company takes profits and divides them up by the number of shares outstanding and gives all share owners a piece of the profit. So if there are 100 shares outstanding, and the company has a profit of $100, a $1 dividend goes to the owner of each share. Utilities are known for giving out good dividends, but the share price is less likely to increase steadily. Retirees like to invest in utilities because it gives them a steady income. When I look at an investment that I have made, I consider it a success if the value of my investment increases at a reasonable rate. Since I don't need dividend income, all my dividends are re-invested in additional shares of stock. Hope this makes some sense... __________________ "It ain't no sin to be glad you're alive"