What happens when a company's share falls from say 80$ to 10$ price?

Question

I understand that market cap will decline considerably if the volume of shares floating in market is a lot. People will have negative sentiment about the company and not buy the share. company then wont get money but does share price falling actually mean END OF THE COMPANY??? i dont think so because this whole market is speculative, wrong rumours can be spread of the company unless quarter results of company are out. Also, if stocks of a company are declining...for every seller there is also a buyer....why is it so?? why would one buy stocks of a failing company or he keeps buying it untill he realises his mistake......please answer both my queries here...thanks a lot !!!!!

Answer 1

Lots of people lose a lot of money.  If you bought 10 shares at 80; you paid $800 for something only worth $100 today.  It doesn't necessarily mean the end of the company, but it does mean that people (buyers) only value that company at $10 per share.  

There are a lot of financial ratios that are based on the amount of money a company has per share, the value of the company per share, the earnings per share, the P/E ratio (price of the stock divided by earnings per share) that people use to value a company.  When earnings go down or a company has a loss, these ratios decline.  This makes a stock less attractive to many buyers who are willing to pay less.  

Someone selling the stock will reduce their asking price until they find a price that someone is willing to pay.  That's why there is a buyer for every sale.  

The reverse is also true.  When a company's stock has gone from $10 to $80 the seller stands to make money.  There are likely still people who will buy at $80.  If the demand for the stock is high, the price will go up.  

good luck!

Someone who buys that $10 share of stock thinks that the company is going to reverse it's fortunes and the stock price will increase from their $10 per share (If it goes to $20, he's doubled his money).  No sane person would buy a $10 stock if they really thought it was going to $5.

Answer 2

Generally the company does badly (or people think it will do badly) and this causes the stock price to go down.  This may cause all sorts of ill effects which then weigh on the company making things worse and worse.  For example if the shares go down enough people may (rightly or wrongly) perceive that the company will fail and will therefore stop doing business with them and even pulling existing business (like people puling there money out of indymac before it failed causing it to fail that much sooner).  Also it gets harder for a company to borrow and banks may want the company to put up more money to cover/ reduce their existing borrowings.  So, the price going down can definitely make things alot harder for the company.  Still, this does not in and of itself cause the company to fail, its just that failing companies also will have this happen to them.

People buy stocks of failing companies because some people think the company will survive.  If a company went from $80 to $10, the guy buying the stock may reason that he thinks the company should survive and if it does it will go back up to $80 eventually since it really hasn't lost much business (usually) but the stock decline is instead due to other problems it is having.  Thus to the buyer this may seem risky but the payoff may seem disproportionate to the cost and therefore worth it.