E.g., Google lost $100b after its AI made a factual error in a demo.
Or when Musk lost $200b.
What happens with that loss? Do they need to do layoffs specifically because of that? Close massive projects? How can a company continue to even exist after that kind of financial loss?
Thanks!
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Stock price is just based on what people _think_ the present value of all future earnings of the company are. Since future earnings are just guesses (based on data, but guesses none the less) if one of the key inputs to how that guess is made changes, people will change what they feel each share of stock is worth.
The money doesn’t “go” anywhere because it never existed in the first place. It was just a valuation, which isn’t the same thing as actual cash. It would be like if you suddenly found a missing Van Gogh in your attic – you are suddenly “richer” but until you actually _sell_ it, that wealth increase is just on paper. If that painting burns up in a fire, you “lose” all of that wealth, but again the actual cash you have doesn’t change one penny.
How companies react will vary depending on what the news is. Shareholders – who are the owners of the company – want the stock price high, so management will usually make changes to try and show the market that their revenues will go back up in the future.
Nothing happens in the moment, but a company has a safety net if they have a high stock price. And conversely, if a company’s stock price is low, they could be in danger.
Because, if a company has a high stock price, and they do something that requires a cash infusion, like expanding to a new office, they can release shares to be traded, at that high price. And if the company has a good idea for the expansion, it can result in more profit than just keeping the stock.
Conversely, if a company has a low stock price, and they need a cash infusion, there are fewer things they can do with it. So even if they have good ideas to turn the company around, they might not get the required capital to put into that turnaround.
The distinction to be made is they are losing billions in value, not necessarily billions in cash. I’m the case of google, their stock value decreased after the AI error in a demo because the poor optics likely convinced people to sell, dropping the price. The value of the company is calculated by multiplying the price of a share times the number of existing shares. For google, with ~11 billion shares, the price drop of ~$9/share at the time of the demo results in your $100b dollar loss of value. The company doesn’t have to pay this money or find it by cutting costs through layoffs, but it does impede their ability to raise money by selling more stock and potentially their ability to recruit employees who would have some stock-based form of compensation.
Stock price is just based on what people _think_ the present value of all future earnings of the company are. Since future earnings are just guesses (based on data, but guesses none the less) if one of the key inputs to how that guess is made changes, people will change what they feel each share of stock is worth.
The money doesn’t “go” anywhere because it never existed in the first place. It was just a valuation, which isn’t the same thing as actual cash. It would be like if you suddenly found a missing Van Gogh in your attic – you are suddenly “richer” but until you actually _sell_ it, that wealth increase is just on paper. If that painting burns up in a fire, you “lose” all of that wealth, but again the actual cash you have doesn’t change one penny.
How companies react will vary depending on what the news is. Shareholders – who are the owners of the company – want the stock price high, so management will usually make changes to try and show the market that their revenues will go back up in the future.
Nothing happens in the moment, but a company has a safety net if they have a high stock price. And conversely, if a company’s stock price is low, they could be in danger.
Because, if a company has a high stock price, and they do something that requires a cash infusion, like expanding to a new office, they can release shares to be traded, at that high price. And if the company has a good idea for the expansion, it can result in more profit than just keeping the stock.
Conversely, if a company has a low stock price, and they need a cash infusion, there are fewer things they can do with it. So even if they have good ideas to turn the company around, they might not get the required capital to put into that turnaround.
The distinction to be made is they are losing billions in value, not necessarily billions in cash. I’m the case of google, their stock value decreased after the AI error in a demo because the poor optics likely convinced people to sell, dropping the price. The value of the company is calculated by multiplying the price of a share times the number of existing shares. For google, with ~11 billion shares, the price drop of ~$9/share at the time of the demo results in your $100b dollar loss of value. The company doesn’t have to pay this money or find it by cutting costs through layoffs, but it does impede their ability to raise money by selling more stock and potentially their ability to recruit employees who would have some stock-based form of compensation.
There is no money that just disappears… it’s a drop in market cap value of the company based on the decline in stock share price.
All it means is that investors are willing to pay less to buy shares of the company, so any investor choosing to sell will get less today than they would have yesterday. But those who hold don’t lose actual money unless they sell.
The drop doesn’t really affect actual company financials at all, but share prices are treated as a report card of sorts and a company that sees a drop in share price might look to cut costs to preserve profits and thus prop up share price.
Here is an example – say you bought a Tesla and it was worth 100k. If you bought it in cash, you now own something that you can resell for say, 75k. So that 75k is “part of your worth” as a person.
Now Tesla has a huge price cut (like they recently did) and sells new Teslas for 75k, meaning your used Tesla just plummeted in value to $25k. You just took a 50k hit to your net worth. Did you really “lose” anything though? Not really, you just lost value of *possible* money via a *possible* sale.
That’s kind of what’s going, a company’s “value” is often based largely on the value of it’s stock. If the stock price goes way down, the company “loses” value, but kind of not really. It’s theoretical money.
The lose as you described doesn’t necessarily mean layoffs. But what’s key here is people buy stock either for dividends (a % of a company’s earnings paid out) or to sell it in the future. A company wants people to buy it’s stock, which means it wants to incentivize people to buy the stock either by showing how it’s going to go up in price or by cutting costs and therefore increasing profit. An easy way to show stockholders you can do either thing is by reducing overhead (laying people off).
**Remember** – a company has an actual, *legal* responsibility to do what’s best financially for the stockholders. If a company reduces stockholder compensation by “being overly nice” to the employees, the company can literally sued into oblivion for breaching this legal responsibility. Companies have no such legal responsibility to do “what’s best” for the employees.
Here is an example – say you bought a Tesla and it was worth 100k. If you bought it in cash, you now own something that you can resell for say, 75k. So that 75k is “part of your worth” as a person.
Now Tesla has a huge price cut (like they recently did) and sells new Teslas for 75k, meaning your used Tesla just plummeted in value to $25k. You just took a 50k hit to your net worth. Did you really “lose” anything though? Not really, you just lost value of *possible* money via a *possible* sale.
That’s kind of what’s going, a company’s “value” is often based largely on the value of it’s stock. If the stock price goes way down, the company “loses” value, but kind of not really. It’s theoretical money.
The lose as you described doesn’t necessarily mean layoffs. But what’s key here is people buy stock either for dividends (a % of a company’s earnings paid out) or to sell it in the future. A company wants people to buy it’s stock, which means it wants to incentivize people to buy the stock either by showing how it’s going to go up in price or by cutting costs and therefore increasing profit. An easy way to show stockholders you can do either thing is by reducing overhead (laying people off).
**Remember** – a company has an actual, *legal* responsibility to do what’s best financially for the stockholders. If a company reduces stockholder compensation by “being overly nice” to the employees, the company can literally sued into oblivion for breaching this legal responsibility. Companies have no such legal responsibility to do “what’s best” for the employees.
Stock prices are based on what people are willing to pay for a share of the company. If I think a company is going to make a lot of money in the future, I am willing to pay more to own part of that company. If I think a company is going to lose money in the future (or not make as much as they should), then I am willing to pay less to own part of that company.
When a publicly traded company has a major foul-up, sometimes the people who already own the stock say “screw this, I’m selling”. If enough people do that, and not enough new people want to buy, the price of the stock might go down.
Imagine there’s a technology company out there that you’ve never heard of. The price of the stock today is $20 a share. Tomorrow they unveil their latest product, a Star Trek style transporter that can teleport people around the world. They demonstrate it, and it works. Suddenly, the stock price is going to skyrocket. Everybody wants to own a piece of this company. The people who already own stock in that company are going to hang on. They don’t want to sell at any price. People are offering a thousand dollars a share, ten thousand dollars a share. The only people who sell are those who really need money badly, because this is obviously a huge game changer. Let’s say that Ricky owns 10 shares (he bought for $200 last week) sells them for $50,000 each. He’s the only person to sell that day. The company’s share price is now listed at $50,000 a share, and the company is valued at 50K times however many shares they have. Everybody else holds on to their shares, hoping the price will go up further.
A week later, we find out that being teleported like that gives you cancer. Oops. While you could still use it to tranport non-living goods, a lot of the excitement is gone. The people who own the shares start to panic, and they want to sell. “I’ll take that $50,000 a share now, please.” Except now people aren’t willing to pay that. There are zero buyers at 50K a share. The people who own shares are looking for anybody who will buy. Now Steve offers to buy at $500 a share, and a bunch of people sell to him. The company is now valued at $500 times however many shares they have.
Where did the extra money go? It never existed. It was just an estimate of how much money the company was worth, if the current situation stayed the same. We only had two sales. Ricky sold shares for 50K, and whoever bought those shares paid him that money. Then Steve paid somebody $500 for some shares. Everything else was just an estimate of worth.
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