When a stock value goes down, the money lost disappears?

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Incubi
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When a stock value goes down, the money lost disappears?

Post by Incubi » Tue, 22. Feb 22, 03:27

I was wondering what happens to the money that is lost when a stock value goes down. Who gets it what happened to it? So, I looked it up and all that I discovered is that it just disappears. That can't be good. Unfortunately, the information on the internet for anyone not a master is very vague. But if the money does disappear from the economy on a global level; meaning the losses does not become someone else's gain in the event the value never rises again, what safeguards are in place to prevent an economic collapse? Or is this the real issue when the market crashers?

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fiksal
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Re: When a stock value goes down, the money lost disappears?

Post by fiksal » Tue, 22. Feb 22, 03:47

Well I am not an economist, however, this isnt money that is backed by physical bills, gold or anything. And the value you are talking about is what you can sell that stock for, its price, that is agreed on.

For you personally, If you dont touch the stock your own, if you dont sell it, you will not feel the impact of its lower price. Unless the stock never recovers.

The stock also means the value of the company, or how its valued, with all its assets and income. That income can also be less than before, explaining the lower value of the company.


So I wouldnt call it "lost", if I make sense.


As far as I know, USA, for example, doesnt have any mechanisms to mitigate loss of values in the stock market(s). I am foggy what exactly can the government control regarding loan rates, as its mentioned periodically.



edit:
there's an example of losing value on a large scale - inflation. In the days later USSR for example, the value of rubl plummeted so far, the original bills were worth nothing, and that was saved
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Re: When a stock value goes down, the money lost disappears?

Post by jlehtone » Tue, 22. Feb 22, 10:02

fiksal wrote:
Tue, 22. Feb 22, 03:47
Well I am not an economist, however, this isnt money that is backed by physical bills, gold or anything. And the value you are talking about is what you can sell that stock for, its price, that is agreed on.
This, probably.

Not a stock example, but: "scalpers". The moment NVidia released first 3000-series cards, some bots bought them for $X. $X was transferred from bot to NVidia. No money was lost or gained. The bot did put the card on sale, asking for $Y, where X<<Y. If someone was so desperate that they bought from the bot, the total result was that $Y far transferred from the buyer, the bot gained $(Y-X) and NVidia got that $X. Amount of money did not change, just where it is. If nobody bought from bot, then either the bot lost that initial $X, or shifted to offer the card for lower price.

Similarly, company creates stock shares. It gets money for the shares it sells. The investor can sell shares when someone is willing to pay (more).
Eventually, NVidia 3000 cards will be worthless waste. Shares of company become worthless waste only if the company quits.

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Re: When a stock value goes down, the money lost disappears?

Post by Incubi » Wed, 23. Feb 22, 04:15

I feel a little silly, but I am even more confused now.

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Re: When a stock value goes down, the money lost disappears?

Post by fiksal » Wed, 23. Feb 22, 05:06

Incubi wrote:
Wed, 23. Feb 22, 04:15
I feel a little silly, but I am even more confused now.
we can keep it simple, what's the most confusing thing?
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Re: When a stock value goes down, the money lost disappears?

Post by Incubi » Wed, 23. Feb 22, 06:04

fiksal wrote:
Wed, 23. Feb 22, 05:06
Incubi wrote:
Wed, 23. Feb 22, 04:15
I feel a little silly, but I am even more confused now.
we can keep it simple, what's the most confusing thing?
The money used for stocks and crypto is still real even if not back by physical money it is just as real and limited in supply. When a product is bought and depreciates in value over time, the money that was involved in the purchase went to wages, R&D, taxes etc... so the money changed hands. When the value of a stock goes down, none of that money changes hands until you sell it. So, the examples of Nvidia scalpers and physical money backing left me confused because I am having difficulty connecting the dots.

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Re: When a stock value goes down, the money lost disappears?

Post by Gavrushka » Wed, 23. Feb 22, 07:44

Ah, the value of a stock is just what the perception of it is at the time. It's complicated because there are so many factors, and even changing key personnel within a company can have a dramatic influence on its perceived value. - The supply of shares in a company is fixed at a given point in time, so if people think the price is gonna go up (mining company strikes a rich vein of a precious metal) then those shares are gonna instantly go up in value as people clamber to acquire them.


There was a company that made cheap jewellery and the like in the UK (Ratner's) and it was remarkably successful. - Then the chairman made a crazy after dinner speech about why the prices of his jewellery was so reasonable, explaining it was because 'it was crap.' - As I remember, everyone wanted to unload their shares, and as no one wanted to buy them, the company became effectively valueless and went under.

In other words, the value changes because people's willingness to buy or sell their stake alters because of many different factors.

And this is the crappest explanation ever. Where's RM when you need him?
“Man, my poor head is battered,” Ed said.

“That explains its unusual shape,” Styanar said, grinning openly now. “Although it does little to illuminate just why your jowls are so flaccid or why you have quite so many chins.”

“I…” Had she just called him fat? “I am just a different species, that’s all.”

“Well nature sure does have a sense of humour then,” Styanar said. “Shall we go inside? It’d not be a good idea for me to be spotted by others.”

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Re: When a stock value goes down, the money lost disappears?

Post by Warenwolf » Wed, 23. Feb 22, 08:29

Incubi wrote:
Wed, 23. Feb 22, 04:15
The money used for stocks and crypto is still real even if not back by physical money it is just as real and limited in supply. When a product is bought and depreciates in value over time, the money that was involved in the purchase went to wages, R&D, taxes etc... so the money changed hands. When the value of a stock goes down, none of that money changes hands until you sell it. So, the examples of Nvidia scalpers and physical money backing left me confused because I am having difficulty connecting the dots.


When media reports on X having lost 99999999 dollars on stocks, they usually mean that stocks X has, have diminished by 99999999 dollars in value.


-----------


Just to reiterate what some others in this thread have already told you but I am gonna use simpler example.

Imagine that you and your significant other buy a house for 100 fantasyeuro.
A later that day your partner decides that the life with you is unthinkable and wants to sell the house ...

You put the house on sale. However nobody wants to buy the house for 100 fantasyeuro despite it being in exactly same condition as when you bought it. Eventually you sell the house for 90 fantasyeuro.

The moment you sell the house, you and your significant other have lost the 10 fantasyeuro.

Now, if you don't sell the house but rather stick with it, you have neither lost or won something but valuation of your wealth will vary depending on perceived value of your house.

Same applies with stocks - you either are in the pluss or minus the moment you sell your stocks.

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Re: When a stock value goes down, the money lost disappears?

Post by jlehtone » Wed, 23. Feb 22, 09:21

Warenwolf wrote:
Wed, 23. Feb 22, 08:29
When media reports on X having lost 99999999 dollars on stocks, they usually mean that stocks X has, have diminished by 99999999 dollars in value.
Indeed. There was no money lost, gained, or transferred.
The price of stock share is what someone is willing to pay for it. That willingness did change.

The "X having lost 99999999 dollars" says:
If X had sold stock yesterday, then X would have got $Y, but if X would sell today, X would get only $(Y-99999999).
Now, X did not sell on either day.
The "assets of X" is merely an estimate: "How much cash would X have, if X could&would sell everything today?"
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Re: When a stock value goes down, the money lost disappears?

Post by Incubi » Wed, 23. Feb 22, 10:11

That makes since, I guess I tripped myself up thinking that the value of a stock can drop without being sold. The way media talks about it feels like a deliberate fog of information rather than clarity. Thanks for helping clear that up.

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Re: When a stock value goes down, the money lost disappears?

Post by Chips » Wed, 23. Feb 22, 12:32

I also only know next to nothing :D However, as I understand it the share is supposed to reflect the value of the underlying company; it's assets, it's income (existing contracts, revenues), its debts. Owning a share means you effectively own a part of the company (there are different share types and you don't really own a part of the company afaik). If the company were wound up (i.e. all assets/stock/products etc were sold off) you'd get a percentage of that sale... after any outstanding debts were paid off.

This is the point where someone like RM can likely point out if we're wrong/false assumptions/part way there but missunderstanding bits and bobs :D

So in my understanding that's why when they go "oh crap we're making less money than we forecast for this quarter/year" the stocks generally fall in price. That's because the underlying value of the company has decreased as the believed value of said company likely includes expected returns/profit over a certain time period as against the companies expected outgoings (rents, wages, pensions, costs). Hence how Tesla is so valuable despite in past years the volume of cars being sold is very low (company valuation worked out at like millions of dollars per car sold, whereas Toyota is about 20k per car sold). The fluctuations may depend if it's temporary (a ship blocking the Suez) or more permanent decline/profitability (shift to smartphones which Nokia didn't lead, and therefore got left behind... same with Blackberry) meaning their ability to make/sell and therefore profit dried up, or innovations/developments that in the future may pay off big time (shift to electric, battery advances, or even just R&D that can be licensed) mean it could be worth more with expected growth/profitability, so the price rises as it's more attractive to gamble on that future.

Why the share price moves so much - buying and selling I always thought. It's worth what someone is willing to pay for it, and things like wars, sanctions, price rises (manufacturing), wage rises, market trends, seasons, disasters (natural or other) affecting manufacturing, logistics for shipping), riots, can all impact upon a companies ability to operate efficiently, make a profit, or remain profitable in the face of competition and their costs. Hence why when everything seemed to be going south with Covid the markets tanked for days on end. If you can't trade, or no-one is producing required components for manufacturing your product, then you can't make money... and if you've wages to pay (or planes to pay for as per airlines) without any income, then... once the company runs out of money it's bankrupt and those shares are worthless. Then Govts finally rode to the rescue to help ensure companies wouldn't go bust via loans and wage help schemes, shares started rising because the spectre of bankruptcy has been postponed.

On a day to day basis the companies have costs to cover, and that requires cash. That cash is via profits, or loans/debt from banks and other lenders (or issuing shares to raise funds from investors) - which can influence company value and therefore likely profitability (servicing your debt) and therefore share price as attractiveness to investors. Hence why when some companies are in trouble they may issue more shares, so investors who believe the company can be turned around into profit, will hopefully buy and supply the cash required. Otherwise they have to sell off assets, and if that doesn't address why it's losing money, it'll not really cause much. Is also reason why people at the top of companies get replaced when "performance is poor" (translation, share price isn't great) as they hope a new person with new ideas/ways to cut costs/grow business, can drive company forward and improve the company once more.

I think markets have mechanisms to suspend trading in shares if the drop is too big in a given day/timeframe, to prevent exploitation (i.e. you own 10% and try to sell that 10%, there's unlikely enough willing buyers at present price to take it off your hands, especially if bad news hit about the company, so the price keeps dropping until someone is willing to buy it - but other investors may also sell believing something is seriously wrong, so prices keep going down... and then it causes a company to collapse maybe? that's a bit i don't get, or alternatively the initial seller then buys at the new super low price to exploit the situation and profit). Likewise I always assumed a rise reflects how much you'd have to pay to persuade an existing shareholder to part with their share.

Share issues are a means of a company to raise funds. They offer X shares and investors pay for those shares (possibly just below the market price in order to make it attractive to investors to actually buy them), and the reason it shouldn't affect the price of the shares is because that transfer of money from the investors is now held as liquid cash by the company. It's worth the X it was prior to the issue and each share represents %age W of company. The share issue means company worth X + cash raised of issue, and the %age W should remain equal on a per share basis. So a flotation involves raising money for the company to invest in it's growth, and the people buying the shares factor in the believed value of the company + the cash the share issue will raise + faith in the ability to invest said cash in a way to grow the company. That's why some companies do well on flotation (as all matches) and some don't (as the latter one they wonder where the income will come from, thinking Facebook's initial flotation - the concern was huge audience, how to monetise because if they can't then...).

So that's my understanding, and I've written it out not because I think it's absolutely correct, but because if it's not and someone has better understanding then hopefully they'll share and I'll learn more too :)

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