E.g., Google lost $100b after its AI made a factual error in a demo.
Or when Musk lost $200b.
What happens with that loss? Do they need to do layoffs specifically because of that? Close massive projects? How can a company continue to even exist after that kind of financial loss?
Thanks!
In: 5
That’s not exactly real money, it’s unrealised gains and losses. Let’s take for example Google, they have a number of shares in the stock market and each costs a certain amount which fluctuates. Let’s assume for this example that they have 100 shares and each costs 10 dollars, therefore all shares together add up to 1000 dollars which is the company’s market cap. The market cap isn’t the sole factor of a company’s valuation, just the added value of all their stocks.
So these 100 shares have been bought by some people at 10 dollars, but their value changes constantly every day, even if by a few cents. If the market is “feeling good” about the company the price goes up, because people want those shares and they’re sought after. If the market is not feeling good about the company this value goes down. I know that “feeling” is an abstract term but really that’s all it is, that’s how the market works, the valuation of a stock’s price is reliant on largely non tangible, abstract things like what investors think of the company
So let’s say that the stock holders are not selling their stocks and people can’t buy any more from that company. That means that each of them has invested 10 dollars for each stock and that money is tied up in the stocks, it’s not money in their pocket they can just spend, unless they sell the stock. If the stock plummets, let’s say to 2 dollars per share, then the market cap suddenly becomes 200 dollars. If the stock price rises, let’s say to 20 dollars, then the market cap becomes 2000 dollars. If the stock holders do not sell their stock and nobody else can buy the stock, these fluctuations are pretty much meaningless. Nobody is losing any more money than they originally spent on the stock and nobody gains any more money than they originally spent on the stock. However since stocks are being sold and bought all the time what the price fluctuations affect is the *possible* profit or loss at any given time. Remember, it’s not money in your pocket until you sell. When you see headlines like “200b loss” it’s not 200 billion being taken from anyone, it just means that the market cap fell by that much. If stock holders sold all their stock before the drop they would have collectively made 200 billion more than they would if they sold after the drop. In some cases this could mean that they would lose money on their initial investment (stock price is lower than what it was when they bought it) or that they would simply make less profit than they could have.
The stock exchange pretty much operates on shoulda, woulda, coulda. Jumpy and inexperienced investors cause such hiking fluctuations to stock prices, but more experienced ones know when it’s warranted and when it isn’t. For example Google’s price dropped because they had a public embarrassment on something ultimately insignificant. The rest of the company didn’t get any worse than it was before the demonstration, so this price dip is a good opportunity for someone to buy their stock since the price will most likely go back to what it was in a short while. That’s because I think we can all understand that this demonstration doesn’t really mean much. But some people “lost faith” in the company from it, took it as a sign that the company is doing bad, and started selling to get rid of their stock, and this creates a cascade of others who see that a lot of people are selling and they get nervous that their investment will go into the negative and they also sell, and this makes a lot of people sell and a lot of selling usually drops the price.
**TL;DR** You haven’t gained or lost any money until you’ve sold. Any fluctuation before that doesn’t actually mean much, it’s not real money it’s potential money.
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