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
Oh boy lots of stuff happens depending on size of a crash. A lot of companies have borrowed money against value in the company, when that value drops debts can become due. Institutional holders of the stock apply rules for fund like company must be worth more than x or have revenue more than y or stock price itself above x dollars. A big enough crash could trigger an automatic sell for these holders which happens in huge crashes, the company can end up being delisted from the exchange and bankrupt. Then this could impact the revenue streams so it’s complete whammy losing customers, debts being due, and the company stock selling at discounted prices is too much for companies to recover from.
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