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I cleared up a major misconception about where your money goes when you buy a stock in yesterday’s article.
I explained how your money doesn’t go to the company whose stock you’re purchasing — it goes to another investor in the secondary market. But that naturally raises another question…
If companies don’t see a penny from these transactions, why do they care so much about their stock price?
The answer has less to do with direct financial gain and more to do with perception, power and corporate governance.
Let’s start with the basics. When you buy a share of Apple (AAPL), Tesla (TSLA), or Microsoft (MSFT), you’re not just buying a piece of the company — you’re buying voting rights.
Every shareholder has a say in certain aspects of how the company is run. One of the most important areas shareholders vote on is the composition of the board of directors.
The board of directors holds significant influence over the company’s strategic decisions, and those seats are highly coveted. For board members to keep their positions, they need shareholder support.
So, how do they ensure that support?
One effective way is by maintaining — or ideally, increasing — the company’s stock price. A rising stock price signals strong performance, keeps shareholders happy, and reduces the likelihood of votes against current board members.
There’s also a widespread misconception that companies are legally required to maximize shareholder value. That’s not entirely accurate.
Companies are legally obligated to act in the best interests of the business as a whole, which includes stakeholders like employees, customers and suppliers — not just shareholders.
However, maximizing shareholder value often aligns with these broader goals, so it’s become the de facto focus for many companies.
Additionally, stock price performance impacts the company’s reputation and its ability to raise capital. While companies don’t directly benefit from secondary market trades, a strong stock price can make it easier to issue new shares in the primary market, secure favorable loan terms, or attract top-tier talent whose compensation packages often include stock options.
Finally, there’s the personal incentive for executives.
Many CEOs and board members hold significant amounts of company stock. A higher stock price increases their personal wealth, creating a clear motivation to keep shareholders — and therefore the market — happy.
In summary, companies care about their stock prices because those prices influence everything from shareholder votes to public perception and even executive compensation.
While your trades in the secondary market don’t directly fund these companies, your vote — tied to your shares — and the collective market sentiment play a huge role in shaping corporate priorities.
The next time you watch a company celebrate a rising stock price, remember that it’s about more than just dollars — it’s about power, stability and the future of the business.
Kane Shieh
Kane Shieh Trading
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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