How can a publicly traded company lose billions of dollars in one day and what happens with that money?

Question

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!

In: 5

Answer 1

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.