How does stock price affect a company? ?

Why does a drastic drop (in some cases make the company bankrupt) affect the company?

Consider what a company does when it goes public. It sells stock to investors- the price paid for that stock is $$ into the company's pockets. In return, the stockholders get to vote on company policies and who serves on their board.

So when google went public, it's stock sold for something like $80. Say they sold 1,000 shares. That day they made $80,000 that they could use for anything related to their business. As the stock price goes up, they make more and more money. It's now at around $500 or something ridiculous so they got an extra $420,000 within the last few years as "capital" to use for running the business and making new investments.

On the flip side, consider Lehman Brothers. Their stock was at $50 a few months ago, so assume they also have just 1,000 shares- that's an extra $50,000 in capital they had. When things went bad, people started selling stock en masse and the price went down. So the company went from having that $50,000 in capital to having $1,000 in capital with a $1 stock price. So the traders are partially to blame for their collapse because nobody wanted to give their money to them with all the rumors about them filing for bankruptcy. When filing for bankruptcy sometimes the investors don't get any money back from their stock because the company has no money left to pay them.

Companies use stock as leverage- they sell more shares when they need money and buy it back from the market when they have excess money. Lehman couldn't sell more shares to make money because they couldn't find buyers to take it at a reasonable price. Google could easily make money today because people are willing to pay the high price for their stock.

Hopefully you get the drift of that... it's a very basic explanation of one of the many reasons these companies are going out of business.

Mostly the companies are failing because of buying mortgage-backed securities. They get their money from these based on borrowers making their monthly payments. Many borrowers can no longer afford to pay those mortgages so there's no money coming in (aka no return on investment)... and the money they used to buy the securities is long gone.

Say you buy a loan for a house for 100.000 from a bank like ramz or motor finance wizard. Say in a year you pay 20,000 off. Because of the interest you will have to pay 350,000 and you will have paid of 2000 not 20,000. Though house buyers are sneaky and think oh ill just wait for a year or 2 for the price and demand go up on the house. Then i'll sell it for 200.000 and ill stop paying interest. But because people do this they stop buying shares so the house is worth 150,000 or back to 100,000 instead of 200,000. So then they will have to pay more money and the house buyer will go on the streets to live.

The companies dont get bankrupt the house buyers do.

Imagine ABC Company decides to list on the stock exchange.

X number of shares in this company are issued at $1.00 per share prior to listing in an IPO (Initial Public Offering).

The IPO proves successful, and all shares are allocated, valuing the company at X multiplied by $1.00

Over many years, the share price increases to $7.50 per share, due to good management, company expansion, demand for shares and good dividends to shareholders.

Market conditions change, and share prices begin to fall. The company can sustain some drop in value, but the greater the drop, the less capital remains available.

Dividends decrease, so shareholders sell to cash in their profits, forcing the share price even lower. The company assesses expenditure, staff and assets to remain solvent.

As market conditions worsen, the company lays off staff and begins to sell assets. Shareholders bail, and substantial losses are incurred.

Without a major financial rescue package, ABC Company has no option but to cease trading.

you have cause and effect mixed up.

a drastic drop in stock prices does not make companies go bankrupt.
a company going bankrupt will make the share price drop rapidly.

why? a share is a % ownership of a company, bankrupt company worthless share... share prices vary by the rate investors think the company is doing. the more profits, the higher the shareprice.

they will soon have mass lay offs.

Mostly frest investment and bank credits + In most of cases Board members are mejor holder of stock - - they gain out of movement and dividend.

Its affect your salary.

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