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
Let’s say you set up a lemonade stand and tell me that if I give you $10 for supplies you’ll give me part of your lemonade stand and even 2 cents of every cup you sell. Sadly, it winds up few people want to buy your lemonade and you sold only a couple of cups.,
But you need more lemons, sugar etc. to make a new batch, and want to spend money on paper glue and sparkles to make a couple of posters to get people to buy your lemonade.
You ask me for another $10 to do so.
But at that point I no longer think you’re really going to sell much lemonade and decide I don’t want to give you another $10 to carry on your lemonade stand. Nor will anyone else.
Now you’re stuck what do you do?
You can try to switch it up and instead of telling me you’ll give my part of your stand and profit, you’ll pay me back the $11 if I give you $10, but we’ll cover bonds another time.
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