Consequences of Stock Price Decrease

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Earnings per Share > Best Practices > Consequences of Stock Price Decrease

Consequences of Stock Price Decrease
Mintra Mitchell, Student (University), United Kingdom, Member
Hi, I would like to know if a company stock price decreases, why is this an issue and what are the consequences?

Consequences of Stock Prices
venkataramanan, Financial Consultant, United States, Member
It is clear that the market's future outlook for this stock is bleak. The down trend should be taken as a warning signal for investors to get out of the stock. However, if it's only short-term volatility this should not be viewed too seriously.

Stock Price Parameters
Anirban Ghosh, Management Consultant, India, Member
The price of a stock depends upon certain parameters.
In a situation where other risk points in the market are stable, the stock price mainly depends upon the company's current profile. The stock price is then nothing but the demand-supply procedure of selling of company's goodwill and asset value. Now if in such a stable market the stock price decreases, it means the company's profile or any other business value dropped, and demand for the stock consequently fell down.
The conclusion then is understandable that the company is doing bad in its business.

What a Stock Price Decline Means
Reynaldo Bonifacio, Accountant, Philippines, Member
A decline which is relevant to the market may indicate impairment of an equity instrument. The judgments made in determining whether there is objective evidence of impairment can significantly affect the amounts an entity recognises in its financial statements. Therefore, the entity should provide disclosure about those judgments made in determining the existence of objective evidence of impairment, as required by IAS 1 presentation of financial statements.

Drop in Stock Prices
IJzer, Turnaround Manager, Netherlands, Member
Two other potential consequences of a decrease in stock price:
1. More shares need to be sold when trying to get additional capital.
2. The company might become the target of a take over.

Meaning of Decline in Stock Price
NITU SINGH, Student (MBA), India, Member
A company issues stocks to raise capital.
If a company's stock price declines in the stock exchange then it implies investors consider the future prospects for this firm to be dim. They believe the firm is not fundamentally strong, so a selling pressure forms in the market.
For the firm of which the stock price declines it means it will be harder to get capital, which could negatively affect the company's expansion plans, diversification plans, operational plans, competition plans, etc.

Find the Reasons for Drop of Stock Price!
Blessing Katuka
The most important thing you have to know is the cause of such a decrease in the share price the reason and its effects via consequences. Decrease in share prices may result from:
- A reduction in dividends which may force company's shareholders to sell part of their ownership in the company to manufacture "home-made dividends" this only happens if the company's clienteles constitute of shareholders with high current consumption rate.
- Also a reduction in operating profits puts pressure on investor to sell off their ownership.
The management concerned must be worried for a such a decrease because this may lead to the following adverse effects:
- With the existence of transaction and floatation costs in the real wold, perfect arbitrage may fail to hold and the firm's value may remain undervalued for some years and its price may ever fluctuate leading to unstable earnings and dividends and hence high cost of capital since investors will regard this firm ads risky.

Stock Price Decrease
GS RADJOU, CEO, France, Member
It can be a reason or opportunity to buy stock too. But in your question it is an issue. If it increases too much it may be a risk too - because one knows that it can't increase forever. After bubbles they burst and the price quickly decreases.
Anyway what is important is the the P/E ratio of the stock with the price given to the market price.

Analysis of a Stock Price Decrease
NITU SINGH, Student (MBA), India, Member
@GS Radjou: Absolutely, the P/E ratio is a vital measure to look at, but a proper fundamental analysis report of the company should be made before any buying or selling of the shares.

Stock Price Decrease
Michela Arno, Financial Consultant, Netherlands, Member
The performance of the stock depends strongly on the evaluation of the future earning potential made by financial analysts. If the stock price declines, this gives a bad signal to investors who will rather invest their money in another (more promising) company.
If you consider that cash is for the company what oxygen is to individuals, this is a very big deal..

2 Categories of Reasons for Stock Prices Decreases
venkataramanan, Professor, India, Member
The reasons for decrease in stock prices may be grouped under 2 major heads:
1. External - environmental, industrial, market factors both national & international. For example a general increase in the BSE index due to external political change.
2. Internal - organizational, product, process & management changes fall under this second category. For example, recently the share prices of Infosys came down due to some top managerial persons leaving the organization. This is internal. .

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