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
You are trading your cash for their share at a given price, a $25 stock dropping to $20 simply means the bid (buyers) and ask (sellers) have met (closed the spread) and shares are changing hands at a given price, or if there are no trades happening it may also be the middle of the gap between what the buyers are willing to pay and sellers are trying to get. The ‘price’ is determined by the balance of these orders, if there are a lot of sell orders and the sellers keep lowering their price to be the first to fill the buy orders, the price will drop, thus a $10B company can ‘lose’ or $6B in ‘value’ with far less than 6B changing hands.
If it helps, you can think of shares as a currency. One day, the Deutschmark is at 3$, a few years down the line, Germany lost a war an it’s at 15 cents. Where did the value in the Deutschmark go? Well, maybe Germany has made some dubious strategic choices in the past few years that put it in a situation it cannot really produce anything of value. Investors around the world think the country is doomed to remain in the 3rd world forever and aren’t investing there.
Same for companies. It’s not that money has disappeared. Simply that the company is felt as less valuable than before by investors.
The best way to think about it is that a share is a percentage of a company, moderated by what people think will happen to that company. Basically if you buy 1% of a company valued at (not necessarily “worth”) a 10K, you’ll have to pay a hundred bucks for it. You don’t own a $100 share; you own 1% of the company. If the valuation (again not necessarily the actual “worth”) of the company drops, then 1% becomes a smaller amount.
Your 10 dollars didn’t exactly “go” anywhere, it’s just that the people willing to buy that 1% share (again not a “$100” share) think that the company is worth less and therefore are willing to pay less for 1% of it.
Edit: in a strictly financial-logic sense, the company lost your money through some miscalculation or accident
The money didn’t go anywhere. You bought something for a value, the value of the item went down. It’s no different than when you buy a car and as soon as you drive it off the lot, the VALUE went down.
Or when you buy food like milk, and even if you put it in the fridge, it will eventually go bad and be worthless. The value or worth of anything can go down, as well as up.
Shares only have the value that people and the market believe they do. They can go bad and their perceived value can go down.
Value is such a slippery thing.
It’s important to remember that money =/= value even if they are tightly bound together. /u/xaradevir explained it excellently, so I will try to avoid rehashing it.
One thing he didn’t mention is that money itself has value that can go up and down, especially how the economic system are set up today. So if the ABC company stays at the same value, but people start thinking that those $$$ are more valuable, then the price of the stock may drop to $90, but the value stayed the same. Of course, the person who sold for $100 would be happy, because the value of his money went up.
Every share has an agreed-upon value. If everyone thought all of your stock shares were trash tomorrow, worth nothing, they would be. There’s nothing backing the value up beside the company’s valuation. But that is fundamentals and does not dictate price alone. If a biotech company goes bankrupt developing a drug and gets denied by the FDA, the shares will crater. It hasn’t gone anywhere, you were just owning something that everyone thought was worth about “this much”.
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.
the same place the money goes when nobody wants to buy your beanie baby: nowhere. because it was *expected* but never *realized*
You bought an item from me for $100. Day later that item is worth $90 because whatever. I still have your $100 and you have an item that is now worth $90.
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