Question

1. Stock price puzzle:

As common sense, investors like to see stock price increasing so they can make a profit.

But, why is it said stock price is far above the normal range is not good for the corporation?

In this case, what do financial managers do?

2. The action to stock price too low:  

If the stock price is too low,

what would be the disadvantages?

what will financial managers do?

Answer 1

(a) The increase in stock price is s good signal for a company, but if the stock price reaches above normal range, then there will be less buyers of the stock and the liquidity of the stock decreases and stock become less traded on exchange with no further trading.

In this case financial managers can try to bring stock back in the range by issuing bonus issues or stock split. So the stock price will reduced accordingly and will be back in normal trading range. This will increase the number of outstanding stock in the market and reduces the price of the stock. For example with 1:2 stock split, each shareholder having 1 old stock will get 2 new stock

(b) If the stock price is too low, it indicates the financial condition of the company is not good. Also if the stock price becomes extensively low, it may become a takeover target.

In this case financial managers either buyback the shares or reverse split the stock. Both these methods reduces the outstanding stocks in the market and stock price increases.For example with 2:1 reverse stock split, each shareholder having 2 old stocks will get 1 new stock