How Share Prices Affect Companies

Readers Question: A company issues stock and sells it in a primary market at a fixed price. In that case, do fluctuations in the stock market affect specific companies? In other words, when the stock value of company crashes, is that company affected at all?

If the company sells 10,000 shares at £1, then it receives £10,000 which it can use for investment. If the share price then fluctuates, it doesn’t change the initial sum the firm gained. For example, if the share price fell to 60p, the firm would still have the initial investment of £10,000. However, if the share price collapsed it would affect the company in some ways:

  • Harder to issue a share rights issue to raise future capital (many banks are trying to do this at the moment)
  • The firm may become subject to a take over, especially if the collapsing share price is due to bad management and other people think they can run the company better.
  • Also, it is worth bearing in mind that a collapsing share price is often a reflection of a badly performing firm – a firm which is making a loss. It is not the other way around ie. it is not that a fall in share prices will cause a firm to become unprofitable and inefficient.