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
Into different classes of assets, typically gold, government bonds, anything that investors view as more stable. That said, the *reason* markets are down is usually because of a sweeping price correction, ie: something people had *thought* was worth a lot of money suddenly turns out to be worth far less.
When times are “good” and everyone thinks they’re getting rich, they’ll be able to spend more money bidding up the price of investments, because that’s generally the smartest thing to do with your money: Invest it into something which will earn you more money. The problem occurs when there’s a new class of investment which appears to be “too good to be true”. Dot.com stocks in 2001, Mortgage-backed securities in 2008, are good examples of this.
John Maynard Keynes, the economist for whom “Keynesian Economics” is named, uses a metaphor to describe the stock market: The [beauty contest](https://en.wikipedia.org/wiki/Keynesian_beauty_contest):
>Keynes described the action of rational agents in a market using an analogy based on a fictional newspaper contest, in which entrants are asked to choose the six most attractive faces from a hundred photographs. Those who picked the most popular faces are then eligible for a prize.
So, everyone is trying to guess what the most popular faces will be, not necessarily the faces they actually think are the most attractive. This phenomenon is how bubbles form. Many investors will put money into a bubble, on the undertaking that they’re better off pumping their money with everyone else caught up in the enthusiasm, then dumping their position at the peak of the buying hysteria. Of course, that means timing is very important. Wait too long, and you can lose your stake on a wildly overinflated bubble, and fundamentally, the people holding bubble stocks are buying them on the hope they can find someone gullible enough to buy the stocks at their now-inflated price.
So, how does a bubble pop? Why can’t everyone just keep trading back shares and making more and more money? Because investments are still tied to real things, and if those real things cease to exist, then the investment becomes worthless. So, if you have $100 in ABC stock, and ABC announces that they’re going into bankruptcy restructuring because they’re deeply in debt, suddenly your $100 worth of stock is worth much, much less, because it turns out the company you own is about to not exist.
This is what happened in 2008, and 2001. In both cases, the underlying asset people had bought shares in simply disappeared. The borrowers defaulted on their loans in 2008, and the dot.com businesses which weren’t making profits closed, and the securities backed by these entities were suddenly worth nothing.
If this is an isolated company that’s folding, no big deal, right? The people who are left holding worthless paper get hosed, but everyone else is unaffected. But when this starts to happen a *lot*, suddenly people who’ve been spending money based on overvalued assets are struck with a reality-check are unable to make payments. So, after your $100 worth of ABC stock vanished, you responsibly decide to stop your subscription for company DEF. In the next quarter, DEF reports that their revenue has dropped, and the putative value of DEF has dropped because it’s now a less profitable company. Now the people holding DEF stock cut some expenses, and reduce the revenue of company GHI, and so on.
What’s important to recognize is that economies are *reciprocal*. They call it the economic engine, after all. Your income is my expense, and vice-versa. When we all stop spending money, we all stop earning money, and suddenly everyone’s cashflow gets tighter.
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