Owning a stock means owning a portion (usually very small) of a publicly-traded company. Therefore, if the value of the entire company fluctuates, so will the value of the stock.
When a share's price decreases in value, that change in value is not redistributed amongany parties –the value of the company simply shrinks. The stock market is governed by the forces of supply and demand. In other words, it is not a zero-sum game, like gambling in a casino, in which there is an equal loser for every winner, and vice versa.
How a Company's Value Can Shrink
First, we need to understand how a company's value is "created."When a stock's price increases, it does so because there are more people willing to buy the stock (demand it) than people willing to sell it (supply it). This high demand in relation to supply creates value for the stock because buyers must compete against one another for it, and the more they want the stock for themselves, the more they are willing to pay for it.
The opposite occurs when a stock price decreases, which simply results from low demand in relation to supply. Just as a high number of buyers creates value, a high number of sellers erodes value.
For example, Waste Management Inc (WM) has 422.03 million shares outstanding as of May 2020.If its share price dropped by $1, it would be roughly equivalent to a $422 million loss in (implicit) value.
So even though it might feel like someone is taking your money when your stock declines, the cash is simply disappearing into thin air with the popularity of the stock. However, this decline in popularity corresponds to something tangible— the company's ability to carry on its operations efficiently,which is reflected in its earnings.
Remember, you are part-owner of the company, so if the stock declines, it means you are part-owner of a company that is no longer perceived to be doing a great job of producing something. And, if you want to get rid of this company, you must be willing to sell it for less. Why? Because its inherent value is perceived to be worth less.
Therefore, on a very basic level, a realized loss from a stock is a reflection of the difference between the market's perception of the company when you bought it and the market's perception of it when you sold it.
(For more on this subject, check out When Stock Prices Drop, Where's the Money?)
FAQs
The most straightforward answer to this question is that it actually disappeared into thin air, due to the decrease in demand for the stock, or, more specifically, the decrease in enough investors' favorable perceptions of it to move the price down by selling.
When stock prices drop, where is the money? ›
Just as a high number of buyers creates value, a high number of sellers erodes value. So even though it might feel like someone is taking your money when your stock declines, the cash is simply disappearing into thin air with the popularity of the stock.
What happens to the money when stock price goes down? ›
The drop in stock prices directly impacts investment portfolios. For individual investors and institutional funds alike, the decrease in the market value of stocks leads to a reduction in the overall worth of investment portfolios.
Do I owe money if my stock goes down? ›
Do I owe money if a stock goes down? If a stock drops in price, you won't necessarily owe money. The price of the stock has to drop more than the percentage of margin you used to fund the purchase in order for you to owe money.
Where does the stock money go? ›
Stocks work like this: Companies sell shares in their business, also known as stocks, to investors. Investors buy that stock, which in turn provides the companies money for expanding their business through creating new products, hiring more employees or other business initiatives.
Where does the money go when a stock collapses? ›
If you have a certain amount in your investment account and that balance drops during a market crash, what happens to that money? It doesn't actually go anywhere, as confusing as it may seem. While it appears that you're losing money during a market crash, in reality, it's just your stocks losing value.
When stocks drop do you lose money? ›
Your portfolio might lose value, but losing value is different than losing money. When stock prices fall, your investments are not worth as much. But the market will inevitably rebound, and when that happens, stock prices will increase once again -- and your portfolio will regain the value it lost.
Do I lose my money if a stock is delisted? ›
Though delisting does not affect your ownership, shares may not hold any value post-delisting. Thus, if any of the stocks that you own get delisted, it is better to sell your shares. You can either exit the market or sell it to the company when it announces buyback.
Can you get money back from losing in the stock market? ›
"If you want to stay invested, sell at a loss and use the proceeds to buy into a similar, but not substantially identical, fund," Wybar says. "This way you can recoup the loss and participate in upside returns when the market goes back up." For example, if you sell Mastercard Inc.
How do people make money when stock prices fall? ›
Short selling is a strategy for making money on stocks falling in price, also called “going short” or “shorting.” This is an advanced strategy only experienced investors and traders should try. An investor borrows a stock, sells it, and then buys the stock back to return it to the lender.
“In other words, the money did not exist or disappear for long-term investors if you did not make any transactions. However, for short-term investors, when stock prices go up or down, the money would be transferred among them as a zero-sum game, i.e. your losses would be others' gains, and vice versa.”
What happens to your money if a stock goes to zero? ›
A drop in price to zero means the investor loses his or her entire investment: a return of -100%. To summarize, yes, a stock can lose its entire value. However, depending on the investor's position, the drop to worthlessness can be either good (short positions) or bad (long positions).
Could the stock market go to zero? ›
And while theoretically possible, the entire US stock market going to zero would be incredibly unlikely. It would, in fact, take a catastrophic event involving the total dissolution of the US government and economic system for this to occur.
Where do you put money when the stock market is down? ›
Look into options like bonds, treasury bills, or other fixed-income securities, as they tend to be more stable during market downturns. Additionally, consider investing in alternative assets like real estate, commodities, or even cryptocurrencies, which can have different market dynamics compared to traditional stocks.
Why did stock prices suddenly drop during the Great Depression? ›
There were many causes of the 1929 stock market crash, some of which included overinflated shares, growing bank loans, agricultural overproduction, panic selling, stocks purchased on margin, higher interest rates, and a negative media industry.
Do I keep my money in the stock market? ›
Key Takeaways. While holding or moving to cash might feel good mentally and help avoid short-term stock market volatility, it is unlikely to be wise over the long term. Once you cash out a stock that's dropped in price, you move from a paper loss to an actual loss.
Where does the money go when you lose on a stock? ›
No one, including the company that issued the stock, pockets the money from your declining stock price. The money reflected by changes in stock prices isn't tallied and given to some investor. The changes in price are simply an independent by-product of supply and demand and corresponding investor transactions.
Where does the money go when a stock goes to zero? ›
When a stock's price falls to zero, a shareholder's holdings in this stock become worthless. Major stock exchanges actually delist shares once they fall below specific price values.
