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
At the heart of it, stocks are a way for a company to access capital from investors. Not all the shares the company manages are available to purchase and therefore can sell additional shares on the market to raise extra cash (and vice versa can buy back shares).
Remember that the stock price **times** available shares **equals** the market capitalization (worth) of a company. So say the stock price going from $5 to $2.50 might mean the book value of the company changed from $20 million to $10 million… but what happens if that company has $15 million in liabilities (i.e. debt)… its not insolvent… no one will borrow them money because they will loose it all in a chapter 11 situation.
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