Because it’s driven by shareholders. Consistent profits is fine for the company itself to continue operating, but doesn’t typically move the needle on stock prices. The amount that shareholders would get as dividend payouts for a consistently profitable company is completely trivial compared against what they get if the share price grows by 20%.
This is a big part of the reason why publicly traded companies are so growth obsessed, often to the detriment of the actual product/service they’re providing, their customers, or their employees.
Their customers then, are the shareholders and not the people who buy their products or services. What happens if they lose the shareholders? If the company already is making enough money to support it self, what is the need for shareholders?
If the company is publicly traded and has shareholders, then it doesn’t have enough money to support itself. When you’re buying a share in the company, what you’re effectively doing is giving such company a loan. And you expect your money back. Plus interest.
Let’s imagine a very simplified example. Company X plans to produce goods valued at $1,000 and they need $990 to produce them (that uncludes all the operational costs like materials, wages, taxes, marketing, etc). They aim for 1% profit margin ($10) at the end of they year. The problem? X management only has $900 in cash. So how can they achieve their goal? One option would be to fire some people, produce less goods and earn less money. Another option would be to seek investment for $90.
Again, this is a very simplified example. So, they go public and create shares which they value at $90. You go and them. Everything looks great, right?
Now the year passes. Balance at the start was $900 + $90 = $990. Then they spend $990 on manufacturing and their balance became $990 - $990 = $0.
X had a great year, they sold everything, there were no issues, happy days! So, $0 + $1,000 = $1,000. But you ask for your loaned money back. So, $1,000 - $90 = $900. And they can’t produce $1,000 worth of goods next year, because they lack your $90.
What X needs to do is to either increase their profit margin in some way to cover your loan or find a way not to give your money back to you. In short, they are either now permanent slaves to shareholders or they need HUGE profit margin, which is not always possible. And when you start factoring in taxes, inflation, reserve funds, etc, company liability just grows sky high.
The reality is that running a business is very hard. US has tens of millions of registered companies and corporations. But you only hear about a few rich outliers in the news. Because majority of them are barely surviving.
Shareholders definitely add to the problem, but one of the inherent flaws in capitalism is that there is a natural growth imperative.
From a macroeconomic perspective governments and economies require growth to insure political stability for consumers and producers. There’s also a need to recoup the amount of currency that banks take out of circulation.
From a microeconomic perspective the growth imperative is driven by the inherent mechanisms of competition and accumulation. Basically, the only way to stay in competition is to increase the investment into a company’s future profits.
Because it’s driven by shareholders. Consistent profits is fine for the company itself to continue operating, but doesn’t typically move the needle on stock prices. The amount that shareholders would get as dividend payouts for a consistently profitable company is completely trivial compared against what they get if the share price grows by 20%.
This is a big part of the reason why publicly traded companies are so growth obsessed, often to the detriment of the actual product/service they’re providing, their customers, or their employees.
Their customers then, are the shareholders and not the people who buy their products or services. What happens if they lose the shareholders? If the company already is making enough money to support it self, what is the need for shareholders?
If the company is publicly traded and has shareholders, then it doesn’t have enough money to support itself. When you’re buying a share in the company, what you’re effectively doing is giving such company a loan. And you expect your money back. Plus interest.
Let’s imagine a very simplified example. Company X plans to produce goods valued at $1,000 and they need $990 to produce them (that uncludes all the operational costs like materials, wages, taxes, marketing, etc). They aim for 1% profit margin ($10) at the end of they year. The problem? X management only has $900 in cash. So how can they achieve their goal? One option would be to fire some people, produce less goods and earn less money. Another option would be to seek investment for $90.
Again, this is a very simplified example. So, they go public and create shares which they value at $90. You go and them. Everything looks great, right?
Now the year passes. Balance at the start was $900 + $90 = $990. Then they spend $990 on manufacturing and their balance became $990 - $990 = $0.
X had a great year, they sold everything, there were no issues, happy days! So, $0 + $1,000 = $1,000. But you ask for your loaned money back. So, $1,000 - $90 = $900. And they can’t produce $1,000 worth of goods next year, because they lack your $90.
What X needs to do is to either increase their profit margin in some way to cover your loan or find a way not to give your money back to you. In short, they are either now permanent slaves to shareholders or they need HUGE profit margin, which is not always possible. And when you start factoring in taxes, inflation, reserve funds, etc, company liability just grows sky high.
The reality is that running a business is very hard. US has tens of millions of registered companies and corporations. But you only hear about a few rich outliers in the news. Because majority of them are barely surviving.
Shareholders definitely add to the problem, but one of the inherent flaws in capitalism is that there is a natural growth imperative.
From a macroeconomic perspective governments and economies require growth to insure political stability for consumers and producers. There’s also a need to recoup the amount of currency that banks take out of circulation.
From a microeconomic perspective the growth imperative is driven by the inherent mechanisms of competition and accumulation. Basically, the only way to stay in competition is to increase the investment into a company’s future profits.