Example: if I bought $100 share of ABC company and tomorrow it’s $90, I get that I would incur a $10 loss if I tried to sell it, but I don’t understand what happens to the $10 difference ABC company still has from me.
Edit: okay so in this scenario:
1. i bought the share from the issuer
2. there is a downturn and the s&p index is down by 3,000 points
The first people to hear that the market is about to drop went ahead and cashed out their $100 share back from abc, however I was not lucky and my share is now worth $90. Wouldn’t ABC company have my $10? All the companies listed on the index, they get to keep the difference of the value of what the share was yesterday vs. today. Sure, the equity part of ABC company got smaller, but they still keep the $10 difference should everyone come back and cash out their shares?
In: Other
The exchange is complete at the point of purchase. You gave them $100, they gave you a share. That share entitles you to dividends, etc.
From then on, everything else operates like any other transaction. You still have one share; they still have your $100. The only difference is the value of the share you have if you were to try to sell it.
When you buy a stock you are paying the seller, which more than likely is not the company.
Think of it like this, you bought a car for 30,000 and now you own it. When you go to sell it, it is worth 25,000. The 5,000 didn’t go anywhere, the car is just worth less.
Imagine you bought a tulip bulb for $100 and tomorrow the going rate is $90 per bulb. It’s the same thing—the going rate for tulip bulbs went down suddenly just like the going rate for a share of a company went down by $10.
In both cases, it doesn’t matter until you want to sell them.
So the money didn’t go anywhere—the person you bought from still has your $100 and you still have the stock/bulb. What’s changed is other people buying and selling bulbs have decided $90 is now the fair price.
It hasn’t gone anywhere.
I have an “item”. You want it. I agree to sell it to you for $1.
The next day, a report is released saying that having this “item” has been conclusively shown to cure and prevent cancer. That was the last “item” I had; I desperately want it back. I negotiate buying it back from you for $1,000 to keep it on my person.
A day later, the news announces that the released report was a fake. Nobody wants my “item” anymore except for $1 again.
Where did the $999 come from? Nowhere. It was us agreeing that such and such thing was worth $1,000 instead of $1. We didn’t create any actual money, we just paid each other different amounts to acquire the “item” at different points. Where did the $999 go? Again, nowhere. We would only be able to agree that it was worth $1 again. If I had kept it the first day I would have been able to sell it for $1,000 the next day and *realize* $999 in gains. If I had sold it the first day then bought it back the 2nd day, then sold it the 3rd day, I would be *realizing* $999 of loss. If I had kept it the whole time I would have gained or lost nothing, realized or unrealized.
ABC company doesn’t have your money. The trader you bought the share from has your money.
It’s like if you sold me your TV for $100, and then I try to re-sell it but can only sell it for $90.
ELI5: it only has a written value. It’s not backed up by real funds.
Its like having the super rare Pokémon trading card. Everybody wants it to act cool, so people are paying good money for it. Then Pokémon gets uncool. Nobody wants it any more, so hypothetical selling prices are going down. But it’s not like you can pay your rent with that money that people would be paying.
The value only becomes real money once the trading transaction happens. Then it’s hard cash again and you can go and pay stuff with it.
Suppose you invest in a company. Powell Motors is a large car company in Detroit. You think they make good cars and you want to buy some stock in the company. Let’s say their stock is at $100 a share. You only have $100, so you buy one share.
Two weeks later, Powell Motors unveils their new car — the car for the common man. It looks like this:
https://simpsons.fandom.com/wiki/The_Homer?file=TheHomer.png
And it costs $82,000. Immediately, the stock price of Powell Motors tanks. Anyone who owns stock in the company sells it for anything they can get. Something has obviously gone critically wrong in that company. You were not paying attention to the news, however, and you missed all the excitement. When you check the stock prices several days later, you see that Powell Motors stock is selling for $20 a share.
Where did your money go? Well, it went to whoever you bought the stock from. If you bought it from the company, then it went to whatever they spent it on. If you bought it from some other guy, then it went in his wallet. You made a trade, you got the stock. If their stock price had gone up, you’d be happy. But it went down. Way down. And now you’re not happy.
You can still keep your stock. It’s yours. You don’t have to sell it at $20. Maybe their stock prices will go back up. Probably not though. The company is likely to go out of business. Then the stock is worth zero. Where did all the money go? The value disintegrated. They put some moron in charge of new car development and he ran the company into the ground.
Think of it like an item from the store. You bought it for 100 dollars from the company(an IPO for example) and it is worth 100 dollars.
Now say you want to sell that item and the price someone is willing to pay is 90 dollars. Now you give them your item and receive 90 dollars, but the transaction has nothing to do with the company anymore other than the value you and the market feel the item has.
The only value the item has to the company past the original sale is the amount they set aside for themselves or the market price if they decide to do another round of funding and create more shares.
If I buy an apple for $1 and sell it to you for $2, where has that extra dollar come from? Your pocket. If I buy an apple for $2, but can only find someone to buy it for $1, it’s the same in reverse. I just take a loss.
The easiest explanation and first thing you need to realize is that when you are selling your stock (ie for 90$ of abc company) someone is also buying it. The 10$ didn’t go anywhere, it was just decided the stock is only worth 90$
Latest Answers