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
There are a LOT of wrong answers saying that its purely a symptom and not a cause, which isn’t actually accurate.
The ability for a company to pay for its operations and development comes from its ability to take out loans and pay debt. Having a high share price means the company can get access to low interest loans using shares as collateral. If the share price drops those companies can no longer service debt for operations. This is why you will see layoffs after a share price crash.
A drop in share price *usually* means the market does not have confidence in a business. So there is a strong correlation between performance and share price.
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