A very dumb question about stocks

A stock is not a loan, it's part ownership in the company. If a company had ten shares of stock and you owned one you would own 10% of the company. I reality, companies usually have millions or billions of shares out there.

What is going on? That's a far more difficult question to answer than it appears. A simple answer would be that 70% of our economic vitality depends on consumer spending. Consumers aren't spending so the economy is weak. They aren't spending because they have already lost their jobs or fear losing it. You can see how this will feed on itself. If everyone stopped shopping at Target the Target would close and the shareholders would lose their money. The health care industry is a little different. People get sick and they need health care. Simple enough. The problem is what will President elect Obama do to change it? Add to this the problems created by the financial industry. They aren't lending to businesses or people. If a business can't fund day to day operations they will go under. People will lose their jobs and your company will lose clients.

It's good to question and fully understand basics. In a capitalist / corporate economy, individuals can put their capital (savings) into an ongoing concern, and share in the fortunes of the company. From the company's point of view, it can raise capital needed for expansion by selling a major stake its future income stream. Accounting conventions call the capital raised Shareholder Equity.

Two examples: a) an IPO (Initial Public Offering) where a company needs capital to move beyond its business start-up phase, and b) recent instances where troubled banks have raised capital to improve their balance sheets with new cash. Selling additional stock dilutes the already outstanding stock.

A company may also seek to borrow money by issuing bonds. Generally, lenders are reluctant to lend to a company that has more debt outstanding than Shareholder Equity. So the company may be forced to sell more shares.

So (besides the emotional "down") it is not good news when the price of a company's stock falls AND the company needs more capital. The lower the share price, the larger number of shares must be sold to raise the same amount of capital. If the business is going rosily, then it is only a question of how much the employees' (mostly executives') options to buy more stock are worth (and the merits of the latter are often a topic of rather hot debate)..

After the IPO the primary source of capital should be the company's income.

No, it's an ownership of the company. A bond is a loan to the company.

That in itself, BTW, does not necessarily mean your business is doing well. Insurance companies are being hit hard just like other financial companies.

The drop in stock prices is primarily due to a liquidity crisis where many want their assets to be in the form of cash or treasury bonds.

A stock represents ownership in a corporation and it represents a greater risk to the investor than bonds (or loans) issued (or acquired) by the same corporation. If a stock is selling for a high price, a corporation can raise more capital by issuing new stock making financial growth possible.

The healthcare corporations vary on the strength of their balance sheet. Can you tell us which company you work for?

-- Ron

A loan to a company is a bond, not a stock. Companies can issue stock to people to raise money. Holders to stock claim a stake to the company's profits. Share prices can change based on changing expectations about the company's future profitability.

Even if the stock price of a company drops, it doesn't really affect the company in that the company can still carry on business as usual. However, stock prices may affect a company's ability to borrow.

I've also wondered why a company cares whether or not its stock price goes down. Isn't part of it that if shareholders are unhappy they can vote out upper management? But if companies own the controlling amount of shares, as is often the case I think (?), then I'm not sure why they would care at all. You hear the expression "keep the stockholders happy" a lot. What is the threat in the stockholders being unhappy?

It's easier to raise money by issuing new stock if the stock price is high (i.e. considerably above book value).

It's difficult with funds owning the majority of shares.

The company becomes vulnerable to a hostile takeover. I own stock in one company that is being threatened with a hostile takeover where the offer is over twice the current stock price.

-- Ron