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.
Where does the money go when you lose in stocks? ›
Values fluctuate, but you are holding stocks, not money. It only becomes money again when you sell it. If you sell your stocks for less than you paid for them, only then have you lost money. That lost money went to the owner of the stock that you bought at the time you bought it.
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.
Do I owe money if my stock goes down? ›
Generally, no. You don't owe money just because a stock goes down.
What happens to my money when a stock goes down? ›
“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.”
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.
Do I get money back from stock losses? ›
Your claimed capital losses will come off your taxable income, reducing your tax bill. Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately).
Do I lose all my money if the stock market crashes? ›
Do you lose all the money if the stock market crashes? No, a stock market crash only indicates a fall in prices where a majority of investors face losses but do not completely lose all the money. The money is lost only when the positions are sold during or after the crash.
Do you actually lose money if stocks go down? ›
No. A stock price can't go negative, or, that is, fall below zero. So an investor does not owe anyone money. They will, however, lose whatever money they invested in the stock if the stock falls to zero.
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.
When you sell stock, where does the money go? ›
The proceeds from the stock sale will be deposited into your brokerage account or sent to you in the form of a check. The amount of money you receive will depend on the price you sell the stock and any fees or commissions charged by the brokerage firm.
Who buys stocks when everyone is selling? ›
But there's one group of investors who charge in to buy when stocks are selling off: the corporate insiders. How do they do it? They have 2 key advantages over you and me that provide them the edge during uncertain times. If you follow their lead, you can have that edge too.
Who gets the money when stocks go down? ›
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 among any parties – the value of the company simply shrinks.
Could the stock market go to zero? ›
Real-World Example of a Stock Losing All Its Value
Sometimes a company will be forced into bankruptcy and its stock fall to zero as the result of an accounting scandal or fraud. Take the famous case of Enron, a large and influential energy and trading company in the 1990s.
Should I take my money out of 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.
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.
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.
Where does the money go when you sell a stock? ›
In most situations and at most brokers, the trade will settle — meaning the cash from the sale will land in your account — two business days after the date the order executes.
