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
The stock price going up or down is a result of the companies performance or its predicted performance.
The directors of the company have the sole task of delivering a profit or dividends to their shareholders.
If they are unable to do so, they are out of a job.
If the price goes down, it means they are either not delivering dividends or the direction of the industry is going to make it tough for the company to produce a dividend (eg. a new competitor or technological change).
So if the stock price goes down, its bad for the company because it represents the actual performance of the company. If the company doesnt perform, the people working at the company will be out of a job – be it the directors and CEO or downsizing/cost cutting on salaries at all levels.
Companies that are making money or predicted to continue making money dont have their stock price drop.
Unless the entire stock market drops (eg. 2020 march covid blip) where the outlook for anything non-telecommunications related dropped for a few months.
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