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What happens to a company when stock prices fall( its stock crashes)?

          You obviously know that every second stock price goes up or down in stock market. Does this effect on company when its stock crashes? Does company want to increase its stock price? Is there any relation with company valuation and its stock price? All the questions and its answers are covered here.

What happens to a company when stock prices fall?

         Firstly you should know that the stock market that we know and from where we sell or buy stocks is the secondary market. It means traders sell any stock that is stored in his/her demat account in stock market and other traders buy it if they wish. Usually companies have no relation with its stock price in stock market from where we sell or buy the stock. Companies raise money selling their stake to the public when they bring IPO(initial public offering). So the ipo is called the primary market when company's promoters sell their stake. In secondary market people buy and sell stock between themselves. And there is no involvement of company in stock market. Let's understand with an example, if any company brings ipo in 200 rupees and on the listing day in stock exchange the company's stock price goes 220 rupees but the company do not get the listing gain and the company is not become  any benefit. Company alloted the share price of 200 rupees in ipo. So when the ipo allotment process is done the company get the money in alloted price for their stake selling to the public. And after stock allotment if listing price will gain then yet the company will not become profitable. Similiarly if stock's listing price goes down then yet the company will not have to face loss. So there is no direct effect of the fluctuation of stock price on the company. But it does not mean that company does not want to increase their share price. Indirectly company gets benefit or faces problems for going up or down of share price. Let's discuss it.


           Imagine if promoters or owners of any company wants to raise fund further from public for one more time by FPO( Further Public Offering) then they obviously wants to bring their fpo in high share price. If not then they have to sell their stake in low share price through fpo so that a good amount does not come to the company for their stake selling. And if company issues any rights( means if company wants to give a option to its existing shareholders to buy more shares of the company),any preferentials or QIP or company pledges promoter's shares to bank as a security to get loan then a good share price helps company to get this. Usually if any stock's each share price is 100 rupees then after pledging its one share to bank the company get about 50-60 rupees from the bank. If the company's share price goes down then bank wants more shares from the company. Because the bank gave loan of 50 rupees when the company's share price was 100 rupees. But now company's one share price is 50 rupees. So bank wants more shares of 50 rupees from the company so that the 50%  ratio is remain same. Now come with fpo. So If company wants to raise fund from public through fpo,issue any rights,prefentials,qip or pledges its shares etc are the factors for that the company wants obviously to increase its share price and also obviously share price movement effects on company. Now understand it conceptually or practically.


       If stock price rapidly decreases such now many good quality stocks and sectors stock price goes down during lockdown then it is a good chance for those promoters who wants to increase their stake on the company buying more shares from stock market in low share price. It is called share buyback when company buy its own share from stock market or promoters buy more shares so that their stake on company will increase more. So this is the two factors when it is seemed to company that the share price is under valued than its fair value then they increase their stake on company and when the stock will increase 5 or 10 X times more then they will become profitable selling their stake. So when company is debt free and have circular cash then company wishes to buyback its shares in low share price. And when stock prices increases more such in 2019 large cap companies touches its all times highest then company obviously wants to bring their ipo because the centiments of the market are good. So company's owner gets more money selling their stake through ipo. So in 2018,2019 many I.P.Os came to market. If company issues any rights,qip,prefentials or wants to raise fund from institutional investors( mutual fund, PMS, wealth management service etc) or public through fpo then the company certainly wants it to do in high share price. 


        If any stock's fair value is 50 rupees and it is traded in 100 rupees because of bull run and market's good sentiments then company can say that we offer qip or rights for you in 10% discount price from market price so take it. But in real the right and fair value of the stock is 50 rupees. When stock price goes in high price then company raises fund from public or institutional investors and when stock price goes in low price than its fair value then company wants to increase their stake. So when promoters increase their stake in company then it is a good sign. But you should not invest blindly seeing one good sign. That you know obviously. But it is a good positive sign. The daily share price movement of any stock does not effect its company. But for any reason if the company wants to raise fund then share price movement effects the company or if any company's shares are pledged in a bank to get loan then the reducing of share price can highly effect the promoters. Because if today share price decreases 5% then bank asks the company to pledge 5% shares more neither they(the bank) sell the shares in stock market. And for this a negative news obviously rises in stock market and the company may be bankrupted. For this share pledging is so risky. 


        There are also many psychological reasons such as much as share price increases the market cap of the company also increases. And the valuation of company is also increased. So it is an ego for promoters to stay before than its competitors company in its sector. And also promoters wants to place a position in the list of top 50 large companies in india or top 100 large companies etc. It may be  a dream for promoters. And if promoters wants  to sell their stake then share price plays a great role. Day to day activity share price fluctuation usually does not effect on company. It is the subject of buyers and sellers.


          If you have any query related to effect on company when its stock crashes then please comment below so that the topic can be covered.


Best wishes to invest.



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