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
Imagine that you found a shiny shell on a beach one day, took it home, and showed all your friends. They agreed that it was super neat, and actually offered you $5 to buy it.
But then, somebody noticed a chip in the shell. Now it is not that interesting, and you are only being offered $1 for the shell.
Your shell just lost $4 of value in one minute. What happened to that $4? Nothing; it is just a change to the price at which the shell happens to be traded. You can still do the same thing with the shell that you did before – you can watch as it glistens in the sun, or put it to your ear and listen to the sea. The only thing you can’t do with it is sell it to someone else for $5.
There is no money that just disappears… it’s a drop in market cap value of the company based on the decline in stock share price.
All it means is that investors are willing to pay less to buy shares of the company, so any investor choosing to sell will get less today than they would have yesterday. But those who hold don’t lose actual money unless they sell.
The drop doesn’t really affect actual company financials at all, but share prices are treated as a report card of sorts and a company that sees a drop in share price might look to cut costs to preserve profits and thus prop up share price.
Stock prices are based on what people are willing to pay for a share of the company. If I think a company is going to make a lot of money in the future, I am willing to pay more to own part of that company. If I think a company is going to lose money in the future (or not make as much as they should), then I am willing to pay less to own part of that company.
When a publicly traded company has a major foul-up, sometimes the people who already own the stock say “screw this, I’m selling”. If enough people do that, and not enough new people want to buy, the price of the stock might go down.
Imagine there’s a technology company out there that you’ve never heard of. The price of the stock today is $20 a share. Tomorrow they unveil their latest product, a Star Trek style transporter that can teleport people around the world. They demonstrate it, and it works. Suddenly, the stock price is going to skyrocket. Everybody wants to own a piece of this company. The people who already own stock in that company are going to hang on. They don’t want to sell at any price. People are offering a thousand dollars a share, ten thousand dollars a share. The only people who sell are those who really need money badly, because this is obviously a huge game changer. Let’s say that Ricky owns 10 shares (he bought for $200 last week) sells them for $50,000 each. He’s the only person to sell that day. The company’s share price is now listed at $50,000 a share, and the company is valued at 50K times however many shares they have. Everybody else holds on to their shares, hoping the price will go up further.
A week later, we find out that being teleported like that gives you cancer. Oops. While you could still use it to tranport non-living goods, a lot of the excitement is gone. The people who own the shares start to panic, and they want to sell. “I’ll take that $50,000 a share now, please.” Except now people aren’t willing to pay that. There are zero buyers at 50K a share. The people who own shares are looking for anybody who will buy. Now Steve offers to buy at $500 a share, and a bunch of people sell to him. The company is now valued at $500 times however many shares they have.
Where did the extra money go? It never existed. It was just an estimate of how much money the company was worth, if the current situation stayed the same. We only had two sales. Ricky sold shares for 50K, and whoever bought those shares paid him that money. Then Steve paid somebody $500 for some shares. Everything else was just an estimate of worth.
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.
Imagine that you found a shiny shell on a beach one day, took it home, and showed all your friends. They agreed that it was super neat, and actually offered you $5 to buy it.
But then, somebody noticed a chip in the shell. Now it is not that interesting, and you are only being offered $1 for the shell.
Your shell just lost $4 of value in one minute. What happened to that $4? Nothing; it is just a change to the price at which the shell happens to be traded. You can still do the same thing with the shell that you did before – you can watch as it glistens in the sun, or put it to your ear and listen to the sea. The only thing you can’t do with it is sell it to someone else for $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.
Imagine you have a lemonade stand, and you are thinking of selling it. Your stand makes like 50 bucks a month, and the word on the street is some people would be willing to buy it from you for 10 times your earnings. So your stand is valued at about 6,000 dollars if it was to be sold to someone else. Next week you get some bad lemons, and some people got sick. The word spreads, and now you are lucky to make 10 bucks a month. Now your company’s value is more like 1200 bucks. The headline in the school paper is that your lemonade stand lost over 5000 dollars in value due to the bad lemons.
At a high level, we are talking about things people are buying and selling (stocks). If people are willing to pay more for them, the value goes up, and if they are willing to pay less for them, the value goes down. Most of Elon’s money is tied up in stock. It is not sitting in a bank account. So say he has a billion shares of tesla, if the trading price goes up or down (for whatever reason), every dollar it goes up his net worth, or the “value” of his shares goes up or down 1 billion dollars. If Googles stock price dips, the value/market cap/value of google goes down. It is different than revenue or money coming into the lemonade stand. It is more about the value of the assets/stocks etc.
Imagine you have a lemonade stand, and you are thinking of selling it. Your stand makes like 50 bucks a month, and the word on the street is some people would be willing to buy it from you for 10 times your earnings. So your stand is valued at about 6,000 dollars if it was to be sold to someone else. Next week you get some bad lemons, and some people got sick. The word spreads, and now you are lucky to make 10 bucks a month. Now your company’s value is more like 1200 bucks. The headline in the school paper is that your lemonade stand lost over 5000 dollars in value due to the bad lemons.
At a high level, we are talking about things people are buying and selling (stocks). If people are willing to pay more for them, the value goes up, and if they are willing to pay less for them, the value goes down. Most of Elon’s money is tied up in stock. It is not sitting in a bank account. So say he has a billion shares of tesla, if the trading price goes up or down (for whatever reason), every dollar it goes up his net worth, or the “value” of his shares goes up or down 1 billion dollars. If Googles stock price dips, the value/market cap/value of google goes down. It is different than revenue or money coming into the lemonade stand. It is more about the value of the assets/stocks etc.
They do not lose billions of *dollars*, they lose billions of dollars worth of *value*. No actual money moves around.
If you have a pet rock, and people come up to you every day offering to buy it from you for $100, then your pet rock is worth $100. If one day people suddenly start offering to buy it for $10 and laughing at the idea of $100, then your pet rock has lost $90 worth of *value*. But no matter how much it’s *worth*, the value never turns into money until the moment you sell it.
They do not lose billions of *dollars*, they lose billions of dollars worth of *value*. No actual money moves around.
If you have a pet rock, and people come up to you every day offering to buy it from you for $100, then your pet rock is worth $100. If one day people suddenly start offering to buy it for $10 and laughing at the idea of $100, then your pet rock has lost $90 worth of *value*. But no matter how much it’s *worth*, the value never turns into money until the moment you sell it.
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