Why is it important for a corporation to maintain the confidence of the stockholder?

Essay by agakutyna October 2005

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It's almost like confidence is its own commodity and serious investors try to beat the curve and buy stock at a point just before confidence rises (leading to a higher market value for the stock).

If confidence in a company's stock is perpetually high (Coca-Cola, Walmart), you can

assume that investors won't see a relatively high return on their investment. People

invest in these kinds of companies because they're confident that the company is a

stable investment. The buy low / sell high kinds of companies are investment risks and

depending on who you are (or when you buy/sell) you might be happy to see confidence


That's the reason I see that share prices / volumes are not part of a company's profit

margin (net income): neither really indicate how much a return the company is getting

from the use of its assets. They're more indicative of market perceptions and forecasts

than an objective snapshot of a corporation's success.

It is important for a corporation to maintain the confidence of the stockholder so they will

continue to either buy, or hold the stock they currently own. Once a poor earnings

report comes out (especially one without a good explanation), the confidence of the

stockholder can be lost. It is very easy for the stockholder to lose confidence especially

if the industry that company is in isn't doing so well. By having quarterly reporting

requirements, and conference calls the company can try and keep the confidence, but I

have to say I work in for an investment advisor and I was listening in on a call from

Enron (before they were exposed) and they just kept reassuring the stockholder that

everything was fine. This was 3 months before the bottom fell out. The reason I am

making this...