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Suppose a company issues its stocks.

When all the investors decide to sell all the stocks of the company on the market, does it mean the market makers must buy back all the stocks that is being sold, no matter how bad the situation of the stocks and the company is?

Does the company suffer anything bad from all its stocks being ditched by its investors?

Thanks!

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When all the investors decide to sell all the stocks of the company on the market, does it mean the market makers must buy back all the stocks that is being sold, no matter how bad the situation of the stocks and the company is?

Absolutely NOT. Market makers are not forced to buy stocks from anyone. They do provide liquidity in the market but they are not your insurance to take a stock off your hands.

Does the company suffer anything bad from all its stocks being ditched by its investors?

Yes. Not including the fact that there is probably some sort of problem with the company if all investors are leaving the stock.

There are many reasons why a company cares about its market price:

  • A companies market cap is calculated by (price * shares outstanding). A market cap is basically what the market is saying your company is worth.
  • A company can offer more shares or sell shares they currently hold in order to raise even more capital.
  • A company can offer shares instead of cash when buying out another company. It can pay for many things with shares.
  • Many executives and top level employees are payed with stock options, so they defiantly want to see there price higher.
  • If the price/market cap declines far enough the stock could possibly be de-listed from the exchange

these are some basic reasons, but there are more and they can be more complex.

Here is an article that answers this question: Why Do Companies Care About Their Stock Prices?

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    Also if the price/market cap declines the stock can be desisted from the exchange. – mhoran_psprep Jun 28 '12 at 16:21
  • @mhoran_psprep Thanks, very good example. Added it to the answer. – Kirill Fuchs Jun 28 '12 at 16:39
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If there were ever a situation where investors en masse dumped shares, which is possible but infrequent, then yes, market makers must take the other side of the trade:

Market makers must maintain continuous two-sided quotes (bid and ask) within a predefined spread. A market is created when the designated market maker quotes bids and offers over a period of time. They ensure there is a buyer for every sell order and a seller for every buy order at any time.

This is applicable on the NYSE as described above, and for the NASDAQ too:

The Nasdaq requires market markers to provide a “two-sided quote” in the securities they cover. This means they must post a price they will buy at and a price they will sell at... The market maker on the Nasdaq is responsible for insuring a market is available for listed securities... The market maker assures that there will be a market for the security; however, they don’t guarantee it will be at the price you want.

One way to think of it is that being a market maker has both risks and rewards. It is generally an easy way to make money off of the bid ask spread. But the downside is the market makers' duty to always take the other side of a trade in the stocks that they cover. This is how the NYSE Glossary defines "market maker":

A market maker must at all times display bid and ask prices, for which minimum quantities and maximum spreads are defined instrument by instrument. A market maker must also meet minimum volume requirements in the contract(s) in which it makes a market. In return, market makers pay lower transaction fees.

If a company's stock is dumped by investors, it is usually a symptom of something the company did wrong, or failed to do at all. It is uncommon for an NYSE listed firm to just have its stock dumped. Reasons for dumping might include suspected fraud, or sudden news indicating a poor outlook given the company's market.

The other problem when this happens for the company is that when the stock is dumped so dramatically, there will be suspicion and negative sentiment i.e. "when there's smoke, there's fire". It will be seen as a sign of poor future prospects. Corporate debt might be downgraded, thus negatively impacting the company's ability to raise funds through future debt offerings.

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    "market makers must take the other side of the trade" - That is NOT true please read your sourcing carefully. A market maker does NOT have to buy or sell a stock "no matter what". There are rules which a MM has to abide by in order to be a MM but, in example, they are NOT forced to buy a stock going down to 0 just because no one else will. – Kirill Fuchs Jun 28 '12 at 16:30
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    @KirillFuchs: I also remember seeing somewhere saying market maker maintain liquidity by taking the other side of trades initiated by investors. If they don't do that, I wonder how they can maintain liquidity? – Tim Jun 28 '12 at 17:59
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    @FeralOink Read what caused the flash crash of 2010 or ask a question on this SE... Market makers do NOT HAVE to take the other side of a trade. By stating "market makers must take the other side of the trade" you are saying there will always be someone to buy your stock <-This is NOT ture. They do not have to take the other side of ANY trade! At the end of the day MM's are there to make money. – Kirill Fuchs Jun 28 '12 at 18:44
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    @Tim ABSOLUTELY!!! That is ALWAYS a possibility. With that being said, it is a very UNLIKELY scenario for popular widely held companies such as Apple, Exxon, Procter & Gamble... It is more likely with stocks being traded OTC but it possible in all markets. – Kirill Fuchs Jun 28 '12 at 19:03
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    @KirillFuchs - Exactly I mean what are the chances of a market giant like Worldcom, Enron, or Lehman Brothers simply going belly up over night? That said there were people paying pennies for the Worldcom stocks months later even when it was clear the company was going to be dissolved. – user4127 Jun 29 '12 at 18:52

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