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Originally Posted by lookout123
not to nitpick, but this has nothing to do with stock. what was downgraded was the credit rating of each company. similar to your FICO, each entity has a credit rating assigned, based on the books and financial outlook. this credit rating affects only debt (bonds) not equity/ownership (stock).
what that means is that if GM wants to borrow more money, the terms under which they can do so just got a lot worse.
the reason stock prices drop dramatically with this news is that stock price is based on expectation of profit. if GM has to pay significantly higher interest payments on newly issued debt then that will erode profits even further... and people aren't as likely to want to own the stock of a company with downward spiraling profit margin... and the cycle continues.
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I stand corrected Lookout, it was the credit rating. What this means is that certain institutional investors will have to pull out since they can only own investment grade bonds. GM and Ford were at the lowest investment grade prior to the downgrade.
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