- A falling stock price doesn't directly hurt a company, since it also got the money for those shares
- Companies with depressed stock prices might be forced to resort to borrowing or holding off expansion
- CEOs and executives also have a vested interest in seeing shares rising
USA TODAY markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at mkrantz@usatoday.com.
Q: How does a falling stock price hurt a company?
A: While no CEO likes to see the company's stock price fall, there's no direct or immediate hit on the company itself.
To understand why, investors need to follow the money. The company only gets money from shares when they were first sold, us
ually in an initial public offering. When the shares were first sold, the company pocketed the proceeds.
But after that initial sale, the shares then trade hands between investors outside the company, including mutual funds, pension plans and individuals. If the stock price falls, these investors lose money, not the company.
There are some very serious secondary effects, though, on a company resulting from stock price declines. Remember, a company's stock can be used as a sort of currency. Companies can sell additional shares of stock, for instance, to buy other companies.
When a stock price falls, that means the company must sell additional shares of stock to raise the same amount of proceeds. That means when a stock price is depressed, doing stock-based deals gets more expensive.
Meanwhile, companies can sell additional shares of stock to raise cash for various purposes, including to expand. When a stock price is falling, the company must sell more shares to raise money.
If a stock price falls by a large amount, a company might be forced to borrow to raise money instead, which is usually more expensive.
There's also some personal fortunes of company executives tied to the stock price. Executives' pay and performance are often linked, at least in part, to the stock's price. If a stock price is falling, they may miss out on bonuses or might suddenly find their jobs on the line. And that's enough to prompt many CEOs to keep an eye on the ticker tape.
