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
Stock price crashing reflects a poor outlook for the company.
Imagine you’re a pharmaceutical company and you’ve invested billions into a new miracle weight loss drug.
Investors are excited and buy up your stock, raising your stock price
A drug trial discovers the drug doesn’t work, and worse causes patients to smell terrible and turn their skin green.
As a company you’re now out of all the money you’ve spent. Maybe you’re even low on cash. You have nothing to show for it. The company is in a possible death spiral.
In this case the stock price is likely to decline sharply since the future for the company is poor.
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