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
It’s a symptom not the cause. Let’s say you start a company that makes and sells lemonade (classic lemonade stand example). People buy stock to get partial ownership because they have faith it’ll make them money. High stock means high faith.
Stock prices always fluctuate but as long as it’s going upward it’s fine. Maybe on Sunday a piece of stock is $10, Monday it’s $11, Tuesday it’s $9, Wednesday it’s $12, Thursday it’s $15, Friday it’s $13, Saturday it’s $17. Yeah it dipped a few times but the pattern shows it’s rising compared to where it was on Sunday. Now if on that next Sunday it was $20 and on Monday it dropped to $0.10 you’ll be wondering “what happened??” Something like that means nobody trusts your product and/or leadership in the lemonade company anymore. So either you call it quits or figure out how to fix it but that’s easier said than done.
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