Have you ever wondered what happened to your socks after putting them in the dryer and never seeing them again? It’s a mystery that nobody knows how to explain, and it may never be solved. Many people feel the same way when they suddenly see that the amount in their brokerage account has dropped. What happened to that money?
Luckily, money made or lost on stocks doesn’t just vanish. Find out what happens to it and what makes it happen by reading.
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Before we talk about how money disappears, it’s important to know that the price of stocks is set by supply and demand. No matter if the market is going up (called a bull market) or down (called a bear market). And how much money you make or lose depends on how the stock prices change.
Buying and selling
If you buy a stock for $10 and then sell it for only $5, you will lose $5 per share. You might think that money goes to someone else, but that’s not the case. The person who buys the stock from you doesn’t get it.
For example, let’s say you were thinking about buying a stock for $15, but before you bought it, the price dropped to $10 per share. You decide to buy at $10 but don’t make any money from the stock’s $5 drop in price. Instead, you got the stock for $10 per share, which is what it is worth on the market now. Even though you think you saved $5, you didn’t make $5. But if the stock goes from $10 back up to $15, you make a $5 profit per share. However, it has to go back up for you to make that $5 profit per share.
The same is true if you own a stock and its price decreases. Forcing you to sell it for less than you bought it for. The person who buys it at that lower price, the price you sold it for, doesn’t necessarily profit from your loss. Instead, they must wait for the stock to go up before making money.
Even the company that gave you the stock doesn’t get any money from its price going down.
Some investors work with a broker to sell a stock at what they think is a high price in the hopes that it will go down. These kinds of trades are called short sales. If the stock price goes down, the person who sold it short makes money by buying it back at a lower price and ending the trade. The broker takes care of the difference between the sale and buys prices. Even though short-sellers make money when the price of a stock goes down, they don’t take your money when you lose money when you sell a stock. Instead, they trade on the market independently and have the same chance of losing or being wrong as investors who already own the stock.
In other words, short-sellers make money when the price goes down, but this is a different deal than bullish investors who bought the stock and are losing money because the price is going down. So the question still stands: Where did the money go?
Implicit and Explicit Value
The simplest answer to this question is that it just vanished, along with the stock’s falling popularity among investors.
But the fact that money can disappear into the unknown shows how complicated and sometimes contradictory it is. Yes, money is a teaser. It’s both abstract and real at the same time. It plays with our dreams and fantasies and gives us our daily bread. More specifically, this double amount of money stands for the two parts that make up the market value of a stock: the implicit value and the exact value.
On the one hand, value can be created or lost when there is a change in a stock’s implicit value, which is based on what investors and analysts think and what they find out. For example, a drug company that owns the patent for a cure for cancer may have a much higher implicit value than a corner store.
Revenue and earnings forecasts are used to figure out the stock’s implicit value. The value depends on how investors see the stock and what they expect from it. If the implicit value changes, which is usually caused by abstract things like faith and emotion. So does the stock price. For example, if the stock’s implicit value goes down, the people who own it lose money because their asset is now worth less than what they paid. Again, the money may not have gone to anyone else, but investors think it has been lost.
Now that we’ve discussed how money is sometimes “not real.” We can’t ignore the fact that it also represents explicit value, which is the real worth of a company. The exact value is also called the accounting value or book value. It is found by adding up all the assets and taking away all the liabilities. So, this is the amount of money left over after a company sold all of its assets at fair market value and pays off all of its liabilities, like bills and debts.
But the company wouldn’t have any implicit value if it didn’t have any explicit value. The force behind a company’s implicit value is how investors think it will use its explicit value.