Why public companies care how their stock price fluctuates? [duplicate]
The folks who hold stock are the legal owners of the company. If a majority of stock holders become unhappy with the management of a company they can fire the executives and put in new management, or they can direct the company to close its doors and sell off its assets. As a crude approximation, the stock holders are happier when the stock price goes up and unhappier when it goes down. Therefore, executives are highly motivated to drive the stock price up.  A frequent criticism of corporate governence is that management can be so motivated to drive the stock price up, that they will take actions that drive the stock price up in the current year, even if undercuts the company in the long term.
You're absolutely right.  That is why I eat at local restaurants instead of fast food.  I get better food at a lower price.  The real problem with fast food is institutional.  Typically, you have a large public corporation with shareholders.  I do not like shareholders.  They usually want maximum returns, but they don't care about the business.  They don't have to work there and they do not make choices about the food or anything else.  They only care about money.  Further, most fast food chains are run by franchisees.  They care more about the product, but there's still a lot of profit motive and they don't have much, if any, control over corporate.  So you end up with competing interests driven by profits and, with that many people demanding money, the product suffers and prices go up.  I think this is a *terrible* model for delivering a quality product.  All the forces at play are trying to cheapen things and increase profit.  A small family-run restaurant doesn't have these problems.  They know they need to make a good product at a fair price or they go out of business.  Without all the grasping hands, that's an easier and less expensive thing to do.  Which is why the small local restaurants get my business.  They give me a better product at a lower price.  I don't think a company like McDonald's is capable of that unless they go private, throw out their shit food and focus on delivering quality at a fair price.  That's just not possible with a shareholder/franchise business model.  It is not efficient. "Google is a poor example since it doesn't pay a dividend (and doesn't expect to), so let's use another example with easy numbers. Company X has a stock price of $100, and it pays a quarterly dividend (many companies do). Let's assume X pays a dividend of $4. Dividends are always quoted in annual terms, as is dividend yield. When a company says that they pay ""quarterly dividends,"" it means that the company pays dividends every quarter, or every 3 months.  BUT, if a company has a $4 dividend, you will not receive $4 every quarter per share. You will receive $4/4 = $1 per share, every quarter. So over the course of a fiscal year, or 4 quarters, you'll get $1 + $1 + $1 + $1 = $4 per share, which is the annual dividend.  The dividend yield = annual dividend/stock price. So in this case, company X's div. yield will be $4/$100 * 100 = 4%. It's important to note that this is the annual yield. To get the quarterly yield, you must divide by 4. It's also important to note that the yield fluctuates based on stock price, but the dividend payment stays constant unless the company states an announcement. For a real world example, consider Intel Corp. (TICKER: INTC) http://finance.yahoo.com/q?s=INTC The share price is currently $22.05, and the dividend is $0.84. This makes the annual yield = $0.84/$22.05 * 100 = 3.80%. Intel pays a quarterly dividend, so you can expect to receive $0.21 every quarter for every share of Intel that you own. Hope that clears it up!" How I understand it is: supply/demand affect price of stock   negatively/positively, respectively. Correct. Volume is the amount of buying/selling activity in these stocks (more   volume = more fluctuation, right?). Sort of.  Higher volume means higher liquidity.  That is, a stock that is traded more is easier to trade.  It doesn't necessarily mean more fluctuation and in the real world, it often means that these are well-understood stocks with a high amount of analyst coverage.  This tends towards these stocks not being as volatile as smaller stocks with less liquidity. Company revenue (and profit) will help an investor predict company   growth. That is one factor in a stock price.  There are certain stocks that you would buy without them making a profit because their future revenue looks potentially explosive.  However, these stocks are very risky and are bubble-prone. If you're starting out in the share market, it's generally a good idea to invest in index funds (I am not a broker, my advice should not be taken as financial advice).  These funds aggregate risk by holding a lot of different companies.  Also, statistics have shown that over time, buying and holding index funds long term tends to dramatically outperform other investment strategies, particularly for people with low amounts of capital. "Check out Professor Damodaran's website: http://pages.stern.nyu.edu/~adamodar/ . Tons of good stuff there to get you started. If you want more depth, he's written what is widely considered the bible on the subject of valuation: ""Investment Valuation"". DCF is very well suited to stock analysis. One doesn't need to know, or forecast the future stock price to use it. In fact, it's the opposite. Business fundamentals are forecasted to estimate the sum total of future cash flows from the company, discounted back to the present. Divide that by shares outstanding, and you have the value of the stock. The key is to remember that DCF calculations are very sensitive to inputs. Be conservative in your estimates of future revenue growth, earnings margins, and capital investment. I usually develop three forecasts: pessimistic, neutral, optimistic. This delivers a range of value instead of a false-precision single number. This may seem odd: I find the DCF invaluable, but for the process, not so much the result. The input sensitivity requires careful work, and while a range of value is useful, the real benefit comes from being required to answer the questions to build the forecast. It provides a framework to analyze a business. You're just trying to properly fill in the boxes, estimate the unguessable. To do so, you pore through the financials. Skimming, reading with a purpose. In the end you come away with a fairly deep understanding of the business, how they make money, why they'll continue to make money, etc." "Why only long term investments? What do they care if I buy and sell   shares in a company in the same year? Simple, your actually investing when you hold it for a long term. If you hold a stock for a week or a month there is very little that can happen to change the price, in a perfect market the value of a company should stay the same from yesterday to today so long as there is no news(a perfect market cannot exist). When you hold a stock for a long term you really are investing in the company and saying ""this company will grow"". Short term investing is mostly speculation and speculation causes securities to be incorrectly valued. So when a retail investor puts money into something like Facebook for example they can easily be burned by speculation whether its to the upside or downside. If the goal is to get me to invest my money, then why not give apply   capital gains tax to my savings account at my local bank? Or a CD   account? I believe your gains on these accounts are taxed... Not sure at what rate. If the goal is to help the overall health of business, how does it do   that? During an IPO, the business certainly raises money, but after   that I'm just buying and selling shares with other private   shareholders. Why does the government give me an incentive to do this   (and then hold onto it for at least a year)? There are many reasons why a company cares about its market price: A companies market cap is calculated by price * shares outstanding. A market cap is basically what the market is saying your company is worth. A company can offer more shares or sell shares they currently hold in order to raise even more capital. A company can offer shares instead of cash when buying out another company. It can pay for many things with shares. Many executives and top level employees are payed with stock options, so they defiantly want to see there price higher. these are some basic reasons but there are more and they can be more complex." In principle, the stock price should see no change in the days leading up to an earnings announcement, and then at the moment of the announcement, the stock price should move in the direction of the earnings surprise (relative to the market's belief of what earnings were going to be). In practice, stock prices tend to drift a little in the direction of the surprise shortly before the announcement and the associated price jump. This could be because smart investors were able to replicate the computations to predict the announcement or because information gets illegally leaked ahead of the announcement.  So I guess your bullet point B is a likely scenario. Note that hedging activity in the options market will not affect stock price one way or another.  Options transfer risk from one party to another but net to zero.  Intense hedging activity may be able to push up the price of options (increasing the implied volatility), but it shouldn't affect the price of a stock one way or the other. For this reason, bullet point A is not the case. Note that price behavior after the announcement is also interesting: it seems to take some time to reach the correct price instead of jumping directly to it as economists would predict.   This phenomenon is known as post earnings announcement drift. Whenever a large number of shares to be sold hit the market at the same time the expectation is that the price for each share will drop. The employees in a normal market would be expected to sell some of their shares at the first opportunity. Because during the dot com boom some companies employees were able to become millionaires, every employee at a tech IPO hopes to be richly rewarded. If the long term prospects of the stock price are viewed by the employees as a continuous path up, then the percentage of shares that will hit the market is low. They do want some instant cash, but want the bulk of the shares to capture future growth. The more dismal the long term price lookout is, the greater the percentage of shares that will hit the market. The general consensus is that as each of the Lock Ups expires a significant percentage of shares will be sold, and the price will suffer a short term drop. RonJohn is right, all shares are owned by someone.  Depending on the company, they can be closely held so that nobody wants to sell at a given time.  This can cause the price people are offering to rise until someone sells.  That trade will cause an adjustment in the ticker price of that stock.  Supply and demand at work.  Berkshire Hathaway is an example of this.  The number of shares is low, the demand for them is high, the price per share is high.