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 don’t go bankrupt from stock crash, it’s more like there was probably an underlying thing of poor performance that caused loss of confidence (and stock price) and then it actually materialized in bankruptcy.
Stock price affects:
– how much money can company raise with new stocks
– loans company might want to take
– how easy it is to purchase (hostile or not) the company
– compensation of people who hold stock (usually people who work for long time or owners)
Stock price doesn’t affect:
– salaries of employees
– operational cash flow and ability to operate as a company
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