Why do companies go bankrupt when their stock price drops?
If companies only make money from stocks during IPO, why do they go bankrupt when the stock price drops? I can’t make the connection.
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The cause/effect is usually the other way around. Since share price is ultimately based on the expectation of future earnings a company going bankrupt due to bad business practices will see its share price drop.
But there are two ways a drop in share price can hurt a company’s ability to raise capital:
1. A dropping share price reflects a lack of confidence in the company which will make lenders less willing to lend and/or require lending at higher rates.
2. If the company wanted to raise funds via a secondary stock offering they would get less per share.
Any highly leveraged company, even if they have a good business model and are generating profits, will have to cease operations if they can’t access funds & cover their bills.
The stocks are their income. If people sell their stock, the price goes down, thus less income. If everyone sells their stock, the company has no income, and can’t stay in business.
I don’t really understand that either. I think it might be because suddenly the company isn’t worth as much because of falling stock. Kind of like your house value when it goes down the drain. Suddenly you can’t get credit or you owe than you are worth. That’s the relation as I see it.