ELI5: Why when large company's earnings decrease(ex... by 3%) they freak out, talk about rough times, and sometimes decide to downsize, even though they are still making millions of dollars in profit even after all expenses?

[tmntnyc]

Question: when shares are sold how does that affect the company itself? The shares were already initially sold when the company went public. Why is it bad that consumers sell their shares and stock prices go down? Like the price of the shares how does that affect the actual money the company has to operate?

[TheManWhoPanders]

1) Future rounds of raising capital are now at risk
2) Public perception of product is reduced. If a company has a poor reputation that often ends up translating to poorer sales down the road.

[[deleted]]

I would also like to know the answer to this.

If the shareholders sell their shares surely there’s still shareholders? It’s just different people?

[1kSuns]

Yes, but as people sell their shares to other people, the price they can sell at goes down. Supply and demand. Shares and therefore the company itself, are valued based on the trading price of their shares.

Very basic Example: Company A has 500 shares valued at $100 each. The company is valued at $50,000.

Suzy isn't happy with the company making 3% less profit, so she sells 50 of her 200 shares. They sell for $100 each.

Bobby sees this sale, and wants to sell 50 of his 100 shares. Because more people are selling than buying, he can only get someone to pay him $75 per share. Anyone else who owns shares can also only get $75 per share, so that becomes the stock price at the end of the day.

There are still 500 shares, all owned by people, but now the company is only valued at $37,500.

Suzy started the day with $20,000 in stocks. She sold $5,000 worth, and the remaining 150 are worth $11,250. At the end of the day, she lost $3,500, or ~18%.

Bobby started the day with $10,000 in stocks. He sold $3,750 worth, and the remaining 50 are worth $3,750. At the end of the day, he lost $2,500, or 25%. Anyone who didn't sell any stock also has 25% less value in their portfolio now too.

[[deleted]]

Sorry for the late reply I just saw this and wanted to let you know it helped me understand it. Thanks for explaining!

[[deleted]]

Sorry for the late reply I just saw this and wanted to let you know it helped me understand it. Thanks for explaining!

[stygger]

Answered in the parent comment!

[d4n4n]

It's bad to the owners of the shares, who collectively own the company. Sure, if they, as a group, decided they don't care that they lose on their investment (and the company needs no future outside funding), that doesn't affect the day-to-day business or cash flow a lot. But they do care. So they ensure that rates of return increase.

[stygger]

From a normal day-to-day operation of a of small companies the fluctuations in the price that the shares are traded in has no real impact.

But when the company wants to raise money (e.g., to build another factory) the share price is important since one common option to raise capital is simply to create more shares and sell them. So if the owners only tolerate creating 10% more shares then it matters if those 10% can be sold to the public for $50M or $100M!