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?
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The $90 represents the amount someone is willing to pay you for your stock, it not actually money in a bank account. You were willing to pay $100 yesterday, but something in the world changed and now people are willing to pay you less. Think of stocks more as Pokémon cards or beanie babies than actual money.
Buying a share = buying a portion of the company = realizing any gains/losses multiplied by the # of shares you own (how much company you own).
you are accepting responsibility for that portion of that company, including any losses or gains that come with that portion of the company.
Most of the money hasn’t been printed. It’s not *money*, it’s “money”. We just agree that “something” must be worth *something*.
Buy a cheesecake for $10. Leave it in the sun. In a week, the cheesecake company still has your $10
The 100$ price is speculative. The asset in stocks is the share, not the value of the share.
Shares of stock represent partial ownership of the company that were sold to raise capital for the company at its IPO. Whether the company has value depends on its success at generating revenue. The value of the stock depends on the potential of the company to stay or become more profitable in the future.
The price of a share is an arbitrary number determined in three possible ways. At an IPO the price is fixed and anyone can buy shares at that price until they are all sold. Once on the market, buyers and sellers place orders where the sellers offer however many shares at a particular price and buyers offer to buy them at a lower price. If sellers are having difficulty finding buyers they might drop the price, they might also compete with other sellers with marginal price changes to be in front of them on the listing, and vice versa for buyers: so the price is determined by supply and demand. Finally the exchanges that facilitate these trades operate their own traders called market makers who, in theory help improve the function of the market.
For example, let’s say dum-dum Mcgee lists a buy order for 10 shares of X at 10$, but a seller is already selling 100 shares at 9$, the market maker would buy the shares from the seller and fulfill dum-dums order (and possibly pocket the differance). The market makers take a number of actions to help orders move along with goal of smoothing out changes in price and reducing fluctuations. In the GME nonsense this took the form of issuing IOU shares where the market makers sold shares they didn’t have with the intent to buy them when they became available. Except, they didn’t become available so they ended up selling 170% of shares that actually existed which is allowed for some reason?
Ultimately the price is determined by the previous price and the change in the ratio of buyers and sellers.
If the price drops from 100 to 90, that means that more sellers entered the market and beat the price of existing sellers, and didn’t immediately find buyers at 100$.
Where did that money go? It didn’t, you still have the share. Go to a shareholder meeting and demand a dividend or something. Vote for board members who won’t drive the company into the ground. Ineffectually argue with customer service people they should do what you want because you are technically the CEOs boss. There are any number of wonderful benefits of owning stock besides the resale value.
Ok imagine shares are celebrities. I buy Chris Pratt 10 years ago for $20 and sell him today for $20m as he’s skyrocketed in demand. However I bought Kevin Spacey 10 years ago for $8 million but today he’s worth 50¢.
The guy I bought Kevin from has $8m but he’s had millions wiped off his value and is now worth pennies so I have something in my possession that has dropped massively in value.
Nobody has physically taken the difference in money away but the perceived worth has changed.
Every trade has two parties, a buyer and a seller. When you sell, someone buys at that price. When you buy, someone sells at that price.
If you bought $100 of ABC, someone sold it to you for $100.
If the price is $90 it means currently the highest offer in the market up for sale is $90. Or really more the last sale that happened, or depending on the listing even the close of the day prior, or an average of some kind.
It might be easier to think of them like apples.
Say everyone in the town has apples. Some have more than others. In the middle of the town is a market where people can trade apples. You would like an extra, so you go down and see how cheap you can buy some. As the buyer you want an apple as cheap as possible. As a seller they want to sell for as high as possible. You end up getting one for $1.00, meaning they sold it for $1.00. Tomorrow you go back down to the apple market and decide you want to sell the apple. You try to sell it for $1.50 to make a profit, but you notice that most of the market has lowered their sale prices. The highest sale price is someone who just sold one for $0.90. And the buyer says he’ll buy your apple for $0.90 too. You try to offer it to him for $1.50 and he laughs and just buys one for $0.90 from someone else instead.
That’s the stock market, in a highly simplified form.
It goes the same place your money went after you bought an apple and ate it.
The guy who sold you the apple pocketed your money and you can’t resell the apple to recoup your losses.
The money doesn’t “go” anywhere.
The value of what you’re holding in your hands decreases, much like the value of your car depreciates over time.
You’re still holding “1 share”. You paid $100 for it originally. But now you can’t sell it for more than $90. So you still have your “1 share”, the company has the $100 you paid for it originally, but if you want to sell it back to them, or you want someone to take it off your hands, you’ll only get $90 back for it.
It’s like the old waiter-puzzle thing. The money hasn’t “gone” anywhere, you’re just looking at it incorrectly. The company still have your $100 from years ago. You still have your 1 share. The only thing that’s changed is that nobody will give you more than $90 for your share any more.
So the answer is you don’t actually “lose” anything until you sell the stock. You traded 100 bucks for a stock. Later the goal is to find someone who will buy the stock for more. On paper you lose money when the value goes down. It’s a lot like buying gold for instance. For some reason people understand gold easier. Say you buy an ounce for 100 bucks (I know not even close to the actual price but not the point). You now have an ounce of gold. You have that gold until you sell it. If say golds value drops to 90 bucks an ounce you can only get about 90 back by selling it to someone willing to buy it. If it shot up to 1000 an ounce you still didn’t truly make more cash until you sell it for cash. I think the reason it’s easier to understand gold instead of stocks even though it’s the exact same explanation is that people can visualize having some amount of gold but owning a stock feels more abstract.
By the way this is the same wealth for the most part that people like Bezos makes. Ya he made billions and billions in wealth but it’s only because the value of Amazon stock went up and he’s just been holding on to it instead of selling it. He never made cash from it (which doesn’t stop him from using it as collateral but that’s an entirely different complicated story about how rich people can have their cake and eat it too thanks just having that much enables banks to blah blah blah long story).
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