Where Does the Money Go When Stock Prices Fall?

When you put your socks in the dryer and then don’t see them again, have you ever wondered what happened to them? It’s an enigma that may never have an explanation. When their brokerage account balance unexpectedly plummets, a lot of people experience the same emotions. What happened to that money?

The money that is made or lost on a stock, fortunately, doesn’t just vanish. Read on to learn what occurs and what causes it.

Vanishing Money

Before we discuss how money disappears, it is crucial to realize that supply and demand determine stock prices regardless of whether the market is increasing (also known as a bull market) or decreasing (also known as a bear market). And whether you gain money or lose it depends on how many stock values fluctuate.

Short Sales

Some investors will place trades with a broker in the hopes of selling a stock at a high price in the future. We refer to this as short-selling trades. If the stock price declines, the short seller benefits by completing the trade by purchasing the stock at the new lower price. The broker gets paid the net difference between the sale and buy prices. Even though they benefit from a falling price, short-sellers do not steal your money when you lose on a stock transaction. Instead, they are engaging in separate transactions with the market and are therefore just as likely to lose money or get their trades wrong as stockholders.
In other words, short-sellers benefit from price falls separately from bullish investors who purchased the stock and are currently losing money as a result of the price decline.

Value, both implicit and explicit

The simplest response to this query is that it truly vanished into thin air along with the stock’s declining demand—or, to be more precise, investors’ positive view of it.

But this ability of money to vanish into the void illustrates how intricate and ambivalent money really is. Yes, money is a teaser because it is both solid, the source of our daily food, and intangible, teasing us with our aspirations and dreams. The implicit and explicit values that go into a stock’s market value are more specifically represented by this duplicity of money.

Unstated Value

On the one hand, the change in a stock’s implicit value, which is established by the individual opinions and in-depth analysis of investors and analysts, can lead to the creation or destruction of value. A pharmaceutical company, for instance, may have a far higher implicit value than a corner store if it has the intellectual rights to a cancer cure.

Implicit value is based on projected revenues and earnings and is determined by investors’ perceptions and expectations for the stock. The stock price changes in response to changes in implicit value, which is truly driven by irrational factors like faith and emotion. For example, when the implicit value falls, stock owners suffer a loss because their investment no longer has the same value as when it was purchased.

Once more, no one else necessarily received the funds; they were misappropriated due to investor views.

Clarified Value

We cannot disregard the fact that money also reflects explicit value, which is the physical value of a corporation, now that we have discussed the somewhat “unreal” aspect of money. The explicit value, also known as the accounting value or book value, is determined by adding up all assets and deducting all liabilities. This sum so represents the money that would remain after a business sold all of its assets at fair market value and settled all of its liabilities, such as bills and debts.
However, the company’s implicit value wouldn’t exist without its explicit worth. The driving factor behind a company’s implicit value is how well investors anticipate it will utilize its explicit value.

Uncovering the Disappearing Trick

As an illustration, if Cisco Systems Inc. (CSCO) had 5.81 billion shares outstanding, a $1 decline in share value would equate to a loss of more than $5.81 billion in (implicit) value. Since CSCO owns numerous billions of dollars in actual assets, we are aware that changes do not occur in explicit value, making the concept of money dissipating into thin air ironically much more real.

In essence, what’s going on is that market experts, analysts, and investors are saying that their expectations for the company have shrunk. As a result, investors are less prepared to pay as much for the stock than they were previously.
Therefore, faith and anticipation can become actual, hard cash, but only to the extent that a business is able to produce something, whether it be a good or service that people require. A company’s earnings will increase and its reputation with investors will grow the better it is at producing its products.

In a bull market, there is a general belief that the market will be able to continue developing and producing. Everyone can profit in a bull market because this perception would not exist if there were no indication that something is being made or will be produced. Of course, in a bad market, the exact opposite is also possible.
In other words, see the stock market as a sizable tool for generating and eradicating wealth. Nobody actually understands why socks go into the dryer and never come out, but at least you can blame market perception the next time you’re wondering where that stock price came from or vanished.