It sounds like a obvious question but hear me out. Yes, I understand why stock price and how a company performs have a direct correlation. I do also understand that a company’s performance affects its stock price. However, I do not understand the other way around, especially when the shares crashes.
This is my understanding how stock works: when a company goes public, the company raises money from the public in exchange to the ownership of the company. Stock price going up doesn’t mean the company gains more money as the investment is already made. Stock price going down doesn’t mean it looses money as they do not have to pay back for the investment. So why do companies go bankrupt due to its stock price crashing (and possibly get delisted)?
In: Economics
Companies can lose value (not actual money) on stock price declines. A lot of public companies have a pool of their own stock for investment and incentive purposes. They can offer stock or options to employees, and sell when the price is up to get more cash for operations. If their stock value declines, the overall value of that pool goes down which effectively means they also decline in overall value.
Latest Answers