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 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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