In a recent Facebook discussion, someone shared the notion that BP’s falling stock price would somehow translate into actual distress for the company. Will it?
Here’s how I understand it: The stock market is a secondary market. A company sells stock to the market to raise cash, but once that stock is sold, all future trading of those shares happens between parties unrelated to the business.
The operational cash flow of the business is completely separate. The business’s stock price only affects the business if they need to raise more capital by selling another stock offering.
It’s also true that the Board of Directors may fire the CEO over a low stock price and bring in a new one. But in a company the size of BP, that’s not likely to have any immediate impact on the company’s financial position, whether or not the market boosts share price in response.
It seems to me if BP’s stock price is tanking but the business is operationally strong. If their liability remains capped at $75 million (as it was by Congress), a tanking share price, far from indicating a business in trouble, may be an opportunity to buy shares in a solid, going concern, at a bargain basement price.
