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
The current stock price represents what investors think the future profits of the company will be.
If the stock price is crashing, that means investors think the company isn’t going to be profitable in the future.
This can start a vicious spiral. If the stock is crashing, potential employees are less likely to join. Why join a company that may go bankrupt? What’s the point of getting stock options if they will be worthless one day? Without good employees, the company will suffer.
It also makes it harder for a company to raise more money by selling more shares. Who wants to buy more stock of a company that may not exist? Without the ability to sell shares, how do you shore up your balance sheet? You could borrow money, but who wants to lend money to a company in a downward spiral?
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