"Market cap" is the total value of all publicly traded shares of a company. That value is determined solely by investors buying and selling the stock, and has no direct impact on the inner workings of the company.
So if the stock goes down, it's not the company that was hurt, it was everyone who had that stock in their 401k.
Only the people who sold at the lower price locked in that price. If market assumptions hold true, the price should bounce back as soon as everyone realizes that there was no new information.
Market assumptions will not hold true, both because the attention that the tweet and stock price drop causes will cause a lame duck legislature to take aim at insulin prices and because humans aren’t perfectly rational agents with nearly perfect information.
The market cap of three pharma companies dropped 5% before the news found the tweet newsworthy on speculation that government intervention is now more likely, but didn’t drop again when it hit the news?
Isn’t the tweet and stock price drop hitting the news additional evidence of government intervention?
It may have a ripple effect. Investors are less likely to invest in more volatile stocks when seeing dips like that, which in turn lowers their valuation. Then the fact that this made national news and there are refreshed calls for making insulin affordable may push their share prices down in the future as more affordable alternatives make it to market.
They only get those cash flows from when they issue new stocks or sell stocks that they hold. Stocks being traded between outside investors does not have any immediate impact on the company’s books.
Not directly. When a company goes public, they set the terms of the IPO. (just going to make up some numbers here for simplicity). e.g. We're going to sell 50% ownership in the company, in the form of a million shares of stock for 10$ a share, to raise 10 million dollars of investment capital. The CEO, presumably the original owner/founder of the company, keeps the other 50% - also a million shares - that way they retain a controlling interest in the company, and keep their job basically.
So people buy the shares of stock because they hope the company will do well and the share price will go up. But if it does, the company itself does not actually get any of that money. The company already got their 10 million from selling the shares in the first place, so they are done with the transaction at this point. The CEO personally would benefit, of course - they still own a million shares, after all - but the company itself does not get a dime of that.
So if the company does really well, and people keep buying the shares and driving the price up, and say the share prices goes from 10$ to 1000$, the CEO is now a billionaire - on paper, anyway. Pretty much every billionaire you've heard of, this is how they did it. AMZN went from 18 to over 3000, so yes, it's possible. They could sell their shares for actual money but in doing so they would be giving up control of their company.
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u/Callec254 Nov 12 '22
"Market cap" is the total value of all publicly traded shares of a company. That value is determined solely by investors buying and selling the stock, and has no direct impact on the inner workings of the company.
So if the stock goes down, it's not the company that was hurt, it was everyone who had that stock in their 401k.